Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates. Spot Liquidity premium rate (basis points) 2.65% 0 3.24% 20 3 3.98% 30

Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates. Spot Liquidity premium rate (basis points) 2.65% 0 3.24% 20 3 3.98% 30

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 23P

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The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? Q1. A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False Q2. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 5.9040% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) a. 5.8627% b. 6.8973% c. 7.8629% d. 8.7596% Q3. Recall that on a one-year Treasury security the yield is 4.9200% and 5.9040% 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 0.2%. What is…
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Suppose the term structure of risk-free interest rates is as shown below. 1 yr Term 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr Rate (EAR %) 2.08 2.42 2.61 3.24 3.87 4.04 5.07 a. Calculate the present value of an investment that pays $5,000 in two years and $3,000 in five years for certain. b. Calculate the present value of receiving $300 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average rate in year 3 and year 5.) c. Calculate the present value of receiving $2,300 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.) a. Calculate the present value of an investment that pays $5,000 in two years and $3,000 in five years for certain, The present value of the investment is $ (Round to the nearest dollar.)
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Suppose the term structure of risk-free interest rates is as shown below: Term Rate (EAR %) 1 year 1.98 2 years 2.35 3 years 2.63 5 years 3.23 ← 7 years 3.84 10 years 4.13 20 years 4.99 a. Calculate the present value of an investment that pays $5,000 in two years and $2,000 in five years for certain. b. Calculate the present value of receiving $400 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year four would be the average rate in year three and year five) c. Calculate the present value of receiving $2,300 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.) a. Calculate the present value of an investment that pays $5,000 in two years and $2,000 in five years for certain. The present value of the investment is $. (Round to the nearest…
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year True False The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? 14.3637% 9.6135% 11.3100% 12.8934% Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% 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 0.2000%. What is the market's estimate of the one-year Treasury rate one year from now? 12.4260%…