Satomi wishes to borrow money for 3 years. She can take out a 3-year loan or three consecutive 1-year loans. The current annual interest rate on a 3-year loan is 4%. If she took out three 1-year loans the current interest rate on a 1 - year loan starting today is 3.50%, the expected interest rate on the second 1-year loan starting next year is 3.75%. If the expectation hypothesis was to hold what would be the expected interested rate on the third 1-year loan? Assume that principle and interest are repaid at the end of the loans. Use the approximate formula to answer this question. Question 15Answer a. 4.25% b. 7.50% c. 4.75% d. 7.25% e. There is not enough information to answer this question
Satomi wishes to borrow money for 3 years. She can take out a 3-year loan or three consecutive 1-year loans. The current annual interest rate on a 3-year loan is 4%. If she took out three 1-year loans the current interest rate on a 1 - year loan starting today is 3.50%, the expected interest rate on the second 1-year loan starting next year is 3.75%. If the expectation hypothesis was to hold what would be the expected interested rate on the third 1-year loan? Assume that principle and interest are repaid at the end of the loans. Use the approximate formula to answer this question. Question 15Answer a. 4.25% b. 7.50% c. 4.75% d. 7.25% e. There is not enough information to answer this question
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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Transcribed Image Text:Satomi wishes to borrow money for 3 years. She can take out a 3-year loan or three consecutive 1-year loans. The
current annual interest rate on a 3-year loan is 4%. If she took out three 1-year loans the current interest rate on a 1 -
year loan starting today is 3.50%, the expected interest rate on the second 1-year loan starting next year is 3.75%. If
the expectation hypothesis was to hold what would be the expected interested rate on the third 1-year loan? Assume
that principle and interest are repaid at the end of the loans. Use the approximate formula to answer this question.
Question 15Answer a. 4.25% b. 7.50% c. 4.75% d. 7.25% e. There is not enough information to answer this question
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