Consider a 1-year treasury bill that currently earns 3.25%. The increase in rates for the above billis shown as follows:YearIncrease in rate1 year from now3.6%2 years from now3.85%The liquidity premium is as follows:2-year securities3-year securities0.07%0.15%Assume that if the liquidity premium theory is correct. Calculate the current rate on 3-year Treasurysecurities.

Liquidity refers to attributes for an investment to get converted into cash and as maturity period…

Consider a 1-year treasury bill that currently earns 3.25%. The increase in rates for the above bill is shown as follows: Year Increase in rate 1 year from now 2 years from now 3.6% 3.85% The liquidity premium is as follows: 2-year securities 3-year securities 0.07% 0.15% Assume that if the liquidity premium theory is correct. Calculate the current rate on 3-year Treasury securities.

Consider a 1-year treasury bill that currently earns 3.25%. The increase in rates for the above bill is shown as follows: Year Increase in rate 1 year from now 2 years from now 3.6% 3.85% The liquidity premium is as follows: 2-year securities 3-year securities 0.07% 0.15% Assume that if the liquidity premium theory is correct. Calculate the current rate on 3-year Treasury securities.

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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Based on economists' forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 0.85% R₁ = E(2r1) = 2.00% E(3r1) = 2.10% E(41) = 2.40% 42 = 43 = 0.08% 0.10% L4 44 = 0.12% Using the liquidity premium theory, determine the current (long-term) rates. Note: Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34). Years 1 2 3 4 Current (Long-term) Rates % % % %
An investor in Treasury securities expects inflation to be 1.8% in Year 1, 2.6% in Year 2, and 3.75% each year thereafter. Assume that the real risk-free rate is 2.35% and that this rate will remain constant. Three-year Treasury securities yield 6.60%, while 5-year Treasury securities yield 8.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
5 Year Treasury Notes are currently yielding 5.50%, and you have found the following interest premium that relate to this investment. Inflation premium 3.00% Liquidity premium 0.00% Default risk premium 0.00% Maturity risk premium 1.25% Given the above information, what is the real risk rate of return?
Assume the real risk-free is 1% and the average annual expected inflation rate is 4%. The DRP and LP for bond A are each 3%, and the applicable MRP is 3%. What is Bond A's interest rate?
Consider the situation where zero rates, measured with continuous compounding, are as in the below table. Suppose that a two-year bond with a principal of $100 provides coupons at the rate of 8% per annum semiannually. What is the theoretical price of the bond. Maturity (years) Zero rate (%) with continuous compounding 0.5 5 1.0 6 1.5 7 2.0 8 $99.60 $99.25 $99.02 $99.89
Suppose we observe the following rates: 1R1= 0.75%, 1R2=1.20%, E(2r1)=0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?
Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 0.90 % E(2r1) = 2.05 % L2 = 0.09 % E(3r1) = 2.15 % L3 = 0.12 % E(4r1) = 2.45 % L4 = 0.14 % Using the liquidity premium theory, determine the current (long-term) rates. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
The pure rate of return is 1.5%. Inflation is expected to be 2% this year and 3% during the next two years. Assume that the maturity risk premium for 2 and 3 years security are 1.2% and 1.3% respectively. What is the yield on 2 year Treasury Securities? Group of answer choices 5.47% 5.20% 5.37% 5.30% Please show the steps.
Currently, 3-year Treasury securities yield 9%, 7-year Treasury securities yield 8.6%, and 10-year Treasury securities yield 8.3%. If the expectations theory is correct, what does the market expect will be the yield on 7-year Treasury securities three years from today? O 8.60% O 8.00% O 8.40% O 8.20% O 8.80%
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, what should the current rate be on two-year Treasury securities? 5.50% 5.625% 5.75% 11.25%
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 2-year security 3-year security 4-year security Expected Return Interest Rate 58 78 10% 128
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next two years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Smith and Carter Inc.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Smith and Carter Inc. issues 10-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 7.35% 7.70% 8.25% 5.05% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be higher…

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