The following table is the current term structure of interest rates based on $1,000 par value zero-coupon bonds.( full process) Bonds Years to Maturity Yield to Maturity (%) A 1 6.00 B 2 7.50 C 3 7.99 D 4 8.49 (a) According to the expectations hypothesis, what is the expected 1-year interest rate 1 year from now in terms of the current term structure of interest rates? (b) According to the liquidity preference theory, is the expected 1-year interest rate 1 year from now higher or lower than the one obtained in (a)? Explain your answer. (c) At what price should Bond C sell for two years from now based on the implied forward interest rates derived from the current term structure of interest rates?
The following table is the current term structure of interest rates based on $1,000 par
|
Bonds |
Years to Maturity |
Yield to Maturity (%) |
|
A |
1 |
6.00 |
|
B |
2 |
7.50 |
|
C |
3 |
7.99 |
|
D |
4 |
8.49 |
(a) According to the expectations hypothesis, what is the expected 1-year interest rate 1 year from now in terms of the current term structure of interest rates?
(b) According to the liquidity preference theory, is the expected 1-year interest rate 1 year from now higher or lower than the one obtained in (a)? Explain your answer.
(c) At what price should Bond C sell for two years from now based on the implied forward interest rates derived from the current term structure of interest rates?
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