Interest rates on 4-year Treasury securities are currently 5.6%, while 6-year Treasury securities yield 7.85%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round you answer to two decimal places.
Interest rates on 4-year Treasury securities are currently 5.6%, while 6-year Treasury securities yield 7.85%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round you answer to two decimal places.
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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![A company's 5-year bonds are yielding 8% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (\(r^*\)) is 2.25%. The average inflation premium is 2.55%, and the maturity risk premium is estimated to be \(0.1 \times (t - 1)\%\), where \(t =\) number of years to maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
[Input box] %](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8d494b17-8b36-49e0-a6a1-3408f9cee0a7%2F9e567150-fbc5-4b25-b164-a8f5ea9d7159%2Fuuojtl_processed.png&w=3840&q=75)
Transcribed Image Text:A company's 5-year bonds are yielding 8% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (\(r^*\)) is 2.25%. The average inflation premium is 2.55%, and the maturity risk premium is estimated to be \(0.1 \times (t - 1)\%\), where \(t =\) number of years to maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
[Input box] %
![**Text for Educational Website:**
Interest rates on 4-year Treasury securities are currently 5.6%, while 6-year Treasury securities yield 7.85%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box] ___ %
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**Explanation:**
The problem provided involves calculating future interest rate expectations using the pure expectations theory. Under this theory, long-term interest rates are essentially an average of current and expected future short-term interest rates. Here, geometric averaging is requested to calculate the expected yield on 2-year securities starting 4 years from now.
The calculation method seeks the future expected short-term rate (for 2-year securities) that satisfies the relationship between the known yields of differing maturities.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8d494b17-8b36-49e0-a6a1-3408f9cee0a7%2F9e567150-fbc5-4b25-b164-a8f5ea9d7159%2F5r1s38k_processed.png&w=3840&q=75)
Transcribed Image Text:**Text for Educational Website:**
Interest rates on 4-year Treasury securities are currently 5.6%, while 6-year Treasury securities yield 7.85%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box] ___ %
---
**Explanation:**
The problem provided involves calculating future interest rate expectations using the pure expectations theory. Under this theory, long-term interest rates are essentially an average of current and expected future short-term interest rates. Here, geometric averaging is requested to calculate the expected yield on 2-year securities starting 4 years from now.
The calculation method seeks the future expected short-term rate (for 2-year securities) that satisfies the relationship between the known yields of differing maturities.
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