The yield to maturity on one-year zero-coupon bonds is 8.3%. The yield to maturity on two-year zero-coupon bonds is 9.3%, Required: a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Short-term interest rate % O Higher O Lower % c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in (b)?

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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Y7

The yield to maturity on one-year zero-coupon bonds is 8.3%. The yield to maturity on two-year zero-coupon bonds is 9.3%,
Required:
a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Forward rate of interest.
%
b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next
year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Short-term interest rate
O Higher
O Lower
%
c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in
(b)?
Transcribed Image Text:The yield to maturity on one-year zero-coupon bonds is 8.3%. The yield to maturity on two-year zero-coupon bonds is 9.3%, Required: a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest. % b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Short-term interest rate O Higher O Lower % c. If you believe in the liquidity preference theory, is your best guess as to next year's short-term interest rate higher or lower than in (b)?
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