8. Demonstrate your understanding on Chapter 6: Expectations Theory/ Cross-Product a. One-year Treasury securities yield 3.95%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 4.4%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. b. An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 17.60%. If the real risk-free rate is 5%, what average rate of inflation is expected in this country over the next 6 years? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look".) Do not round intermediate calculations. Round your answer to the nearest whole number.
8. Demonstrate your understanding on Chapter 6: Expectations Theory/ Cross-Product
a. One-year Treasury securities yield 3.95%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 4.4%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.
b. An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 17.60%. If the real risk-free rate is 5%, what average rate of inflation is expected in this country over the next 6 years? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look".) Do not round intermediate calculations. Round your answer to the nearest whole number.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images
