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Recall that on a one-year Treasury security the yield is 4.0000% and 5.4000% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.4%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) O 6.8509% O 6.0096% O 7.6322% O 5.1082% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) O 5.46% O 6.69% O 6.53%

Recall that on a one-year Treasury security the yield is 4.0000% and 5.4000% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.4%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) O 6.8509% O 6.0096% O 7.6322% O 5.1082% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) O 5.46% O 6.69% O 6.53%

Essentials Of Investments
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
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**Understanding Treasury Yield Estimations** When analyzing Treasury securities, it's crucial to estimate future rates using current data. Below are two scenarios that illustrate how to determine the market's estimates using given yield information. --- **Scenario 1:** - **Current Yields:** - 1-Year Treasury Security: 4.000% - 2-Year Treasury Security: 5.400% - **Conditions:** - The 1-year security does not have a maturity risk premium. - The 2-year security includes a maturity risk premium of 0.4%. **Question:** What is the market's estimate of the 1-year Treasury rate one year from now? **Answer Options:** - 6.8509% - 6.0096% - 7.6322% - 5.1082% *(Note: Do not round your intermediate calculations.)* --- **Scenario 2:** - **Current Yields:** - 2-Year Treasury Security: 5.83% - 5-Year Treasury Security: 6.20% **Assumption:** Assuming that the pure expectations theory is correct. **Question:** What is the market's estimate of the 3-year Treasury rate two years from now? **Answer Options:** - 5.46% - 6.69% - 6.53% - 6.45% *(Note: Do not round your intermediate calculations.)* --- **Understanding the Concepts:** Treasury yields are influenced by various factors including interest rate expectations, inflation, and risk premiums. In these exercises, the aim is to understand how to predict future yields based on current information and given assumptions. The pure expectations theory suggests that long-term interest rates can be used to predict future short-term rates, assuming no additional risk premiums are applied. By carefully analyzing these scenarios, you can gain a deeper understanding of market expectations and interest rate predictions.
Transcribed Image Text:**Understanding Treasury Yield Estimations** When analyzing Treasury securities, it's crucial to estimate future rates using current data. Below are two scenarios that illustrate how to determine the market's estimates using given yield information. --- **Scenario 1:** - **Current Yields:** - 1-Year Treasury Security: 4.000% - 2-Year Treasury Security: 5.400% - **Conditions:** - The 1-year security does not have a maturity risk premium. - The 2-year security includes a maturity risk premium of 0.4%. **Question:** What is the market's estimate of the 1-year Treasury rate one year from now? **Answer Options:** - 6.8509% - 6.0096% - 7.6322% - 5.1082% *(Note: Do not round your intermediate calculations.)* --- **Scenario 2:** - **Current Yields:** - 2-Year Treasury Security: 5.83% - 5-Year Treasury Security: 6.20% **Assumption:** Assuming that the pure expectations theory is correct. **Question:** What is the market's estimate of the 3-year Treasury rate two years from now? **Answer Options:** - 5.46% - 6.69% - 6.53% - 6.45% *(Note: Do not round your intermediate calculations.)* --- **Understanding the Concepts:** Treasury yields are influenced by various factors including interest rate expectations, inflation, and risk premiums. In these exercises, the aim is to understand how to predict future yields based on current information and given assumptions. The pure expectations theory suggests that long-term interest rates can be used to predict future short-term rates, assuming no additional risk premiums are applied. By carefully analyzing these scenarios, you can gain a deeper understanding of market expectations and interest rate predictions.
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