FINANCE

8. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1 = 5 percent, E(2r1) = 6 percent, E(3r1) = 7.5 percent E(4r1) = 6.85 percent

Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securiti
es.

1. 👍
2. 👎
3. 👁
1. 1R1 = 6%
1R2 = [(1 + .06)*(1 + .07)] 1/2- 1 = 6.5%
1R3 = [(1 + .06)*(1 + .07)*(1 + .075)] 1/3- 1 = 6.8%
1R4 = [(1 + .06)*(1 + .07)*(1 + .075)*(1 + .0785)] 1/4- 1 = 7.1%

1. 👍
2. 👎

Similar Questions

1. FINANCE

Yield to call Six years ago, the Singleton Company issued 20-year bonds with a 14 percent annual coupon rate at their \$1,000 par value. The bonds had a 9 percent call premium, with 5 years of call protection. Today, Singleton

2. Calculus

Suppose that the machinery in question costs \$104000 and earns profit at a continuous rate of \$69000 per year. Use an interest rate of 9% per year, compounded continuously. When is the present value of the profit equal to the cost

3. math

Case: A borrower received a 30-year ARM mortgage loan for \$200,000. Rate caps are 3/2/6. The start rate is 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is LIBOR (for

4. Corporate Finance

19. Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the MACRS rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.

1. College Finance

1.A recent edition of The Wall Street Journal reported interest rates of 10.75 percent, 11.10 percent, 11.48 percent, and 11.75 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased

2. FINANCE

3. Unbiased Expectations Theory One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct,

3. Math

Find the interest rate. All rates are annual interest rates. 1. Principle \$400 rate 5% time 1 year A. \$10 B. \$20 C. \$40 D. \$200*** 2. Principle \$1000 rate 8.5% time 3 year A. 255*** B. 170 C. 22.5 D. 17 3. Principle \$200 rate 9%

4. Consumer Math

1. Ken bought a car last year to drive back and forth to work. Last year he spent \$1,098 on gas. This year, it was \$1,562. What is the inflation rate? a. About 51% b. About 42% c. About 20% d. About 39% I believe it is b is this

1. finance

1. Yest Corporation's bonds have a 15-year maturity, a 7% semiannual coupon, and a par value of \$1,000. The market interest rate (r) is 6%, based on semiannual compounding. What is the bondâ€™s price? 2. A 20-year, \$1,000 par

2. Macroeconomics

You read in a newspaper that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that the real interest rates are equalized in the two countries and that purchasing-power

3. FINANCE

5. Forecasting Interest Rates Assume the current interest rate on a one-year Treasury bond (1R1) is 5.00 percent, the current rate on a two-year Treasury bond (1R2) is 5.75 percent, and the current rate on a three-year Treasury

4. Math/Finance

Due to a recession, expected inflation this year is only 2%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2%. Assume that expectations theory holds and the real risk-free rate