The current rate of one-year, two-year, three-year and four-year treasury security.

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Answer 1

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Chapter 2, Problem 8P

Summary Introduction

To determine: The current rate of one-year, two-year, three-year and four-year treasury security.

Expert Solution

Answer to Problem 8P

The current rate of one-year is 6%, two-year is 6.50%, three-year is 6.83% and four-year treasury security is 7.09%.

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 6%.

Current Rate2−Year=[((1+RateYear 1)×(1+Expected RateYear 2))(1n)−1]=[((1+6%)×(1+7%))(12)−1]=[1.064988−1]=0.064988 or 6.50%

Therefore, the current rate of two-year treasury security is 6.50%.

Determine the current rate of three-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2)×(1+Expected RateYear 3))(1n)−1]=[((1+6%)×(1+7%)×(1+7.50%))(13)−1]=[1.068315−1]=0.068315 or 6.83%

Therefore, the current rate of three-year treasury security is 6.83%.

Determine the current rate of four-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2)×(1+Expected RateYear 3)×(1+Expected RateYear 4))(1n)−1]=[((1+6%)×(1+7%)×(1+7.50%)×(1+7.85%))(14)−1]=[1.070852−1]=0.070852 or 7.09%

Therefore, the current rate of four-year treasury security is 7.09%.

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 8P

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