3. Question 3 (unbiased expectations theory). Assume the unbiased expecta- tions theory (Chap 2, L-G 2-7) is true throughout this question. (a) The current one-year Treasury bill rate is 5.2 percent and the expected one- year rate 12 months from now is 5.8 percent. What should be the current rate for a two-year Treasury security? (b) Suppose we observe the following rates: R1 = 8%, R: = 10%. What is the one-year interest rate expected one year from now, E(:r)? (c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity 5 Treasuries are lower than that of shorter maturity Treasuries). What does this imply about the expectation of the movement of short-term interest rate in the future? Will it go up, go down, or stay roughly unchanged?
3. Question 3 (unbiased expectations theory). Assume the unbiased expecta- tions theory (Chap 2, L-G 2-7) is true throughout this question. (a) The current one-year Treasury bill rate is 5.2 percent and the expected one- year rate 12 months from now is 5.8 percent. What should be the current rate for a two-year Treasury security? (b) Suppose we observe the following rates: R1 = 8%, R: = 10%. What is the one-year interest rate expected one year from now, E(:r)? (c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity 5 Treasuries are lower than that of shorter maturity Treasuries). What does this imply about the expectation of the movement of short-term interest rate in the future? Will it go up, go down, or stay roughly unchanged?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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3. Question 3 (unbiased expectations theory). Assume the unbiased expecta-
tions theory (Chap 2, L-G 2-7) is true throughout this question.
ns mak
(a) The current one-year Treasury bill rate is 5.2 percent and the expected one-
year rate 12 months from now is 5.8 percent. What should be the current rate
for a two-year Treasury security?
ke 4 ee
(b) Suppose we observe the following rates: R1 = 8%, iR2 = 10%. What is the
one-year interest rate expected one year from now, E(2rı)?
5,000
(c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity
vings
needs
he
nd the
Treasuries are lower than that of shorter maturity Treasuries). What does this
imply about the expectation of the movement of short-term interest rate in
the future? Will it go up, go down, or stay roughly unchanged?
5The same is not true about most other forms of loans. For instance, there is no tax deduction from
credit card interest payments. As you work through this question, think about what is the motivation
for the government to adopt this policy for mortgages.
6Compare with a hypothetical world in which there is no mortgage interest tax deduction.
e 5 of 6
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A- A-
Aa A
AaBbCcDdEe
AaBbCcDdEc
AaBbCcDdEe
AaBbCcDdEe
AaBbCcDdEe
AaBbCcDd AaBbCcDdE
国Re
В
- abe X, x2
A . A
List Paragraph
No Spacing
Table Paragr.
Styles
Pane
Normal
Body Text
Heading 1
Heading 2
3. Question 3 (unbiased expectations theory). Assume the unbiased expecta-
tions theory (Chap 2, L-G 2-7) is true throughout this question.
ns mak
(a) The current one-year Treasury bill rate is 5.2 percent and the expected one-
year rate 12 months from now is 5.8 percent. What should be the current rate
for a two-year Treasury security?
ke 4 ee
(b) Suppose we observe the following rates: R1 = 8%, iR2 = 10%. What is the
one-year interest rate expected one year from now, E(2rı)?
5,000
(c) Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity
vings
needs
he
nd the
Treasuries are lower than that of shorter maturity Treasuries). What does this
imply about the expectation of the movement of short-term interest rate in
the future? Will it go up, go down, or stay roughly unchanged?
5The same is not true about most other forms of loans. For instance, there is no tax deduction from
credit card interest payments. As you work through this question, think about what is the motivation
for the government to adopt this policy for mortgages.
6Compare with a hypothetical world in which there is no mortgage interest tax deduction.
e 5 of 6
1574 words
English (United States)
O Focus
170%
口國 E
19
étv
**.
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