The annual rates from year 1 to year 4.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 2, Problem 14P

Summary Introduction

To determine: The annual rates from year 1 to year 4.

Expert Solution

Answer to Problem 14P

The current rate of one-year is 5.65%, two-year is 6.22%, three-year is 6.47% and four-year treasury security is 6.67%.

Explanation of Solution

Determine the current rate of one-year and two-year treasury security

The current rate of one-year treasury security is already given, which is 5.65%.

Current Rate2−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%))(12)−1]=[1.062234−1]=0.062234 or 6.22%

Therefore, the current rate of two-year treasury security is 6.22%.

Determine the current rate of three-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2)×(1+Expected RateYear 3+Liquidity PremiumYear 3))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%)×(1+6.85%+0.10%))(13)−1]=[1.064651−1]=0.064651 or 6.47%

Therefore, the current rate of three-year treasury security is 6.47%.

Determine the current rate of four-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2)×(1+Expected RateYear 3+Liquidity PremiumYear 3)+(1+Expected RateYear 4+Liquidity PremiumYear 4))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%)×(1+6.85%+0.10%)×(1+7.15%+0.12%))(14)−1]=[1.066657−1]=0.066657 or 6.67%

Therefore, the current rate of four-year treasury security is 6.67%.

Summary Introduction

To determine: The yield curve for the current rate.

Expert Solution

Explanation of Solution

The yield curve is as follows:

Financial Markets and Institutions, Chapter 2, Problem 14P

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

The following data provides the monthly Comcast cable bill for a random sample of 20 households along with the number of televisions in the household (TV), the number of people living in the household (People), and the number of years that household has been a Comcast customer (Years). Bill TV People Years $56 1 3 8 $59 3 5 11 $67 3 2 3 $75 2 3 8 $76 4 1 8 $82 1 5 4 $84 3 3 3 $84 1 3 8 $84 4 4 4 $90 2 4 3 $91 3 5 5 $100 2 7 9 $100 2 2 5 $102 4 4 6 $104 3 5 10 $104 3 4 6 $112 4 3 2 $114 4 5 8 $130 5 5 1 $135 5 6 7 Develop a regression equation that will predict the monthly Comcast cable bill for a household based on the number of televisions in the household, the number of people living in the household, and the number of years that household has been a Comcast…

can you provide correct answer for this question? If the Net Present Value (NPV) of a project is positive, it indicates: A. The project is unprofitableB. The project is financially viableC. The project has no riskD. The project will increase costs

I need correct answer for this question! If the Net Present Value (NPV) of a project is positive, it indicates: A. The project is unprofitableB. The project is financially viableC. The project has no riskD. The project will increase costs

Answer 2