Expectation theory: Expectation theory is used to find forward interest rate based on the prevailing long term interest rates. Calculate the forward rate as follows: Forward rate = ( ( N th year × N th year interest rate ) − ( ( N-1 ) th year × ( N-1 ) th year interest rate ) ) Given two year Treasury bond rate is 1.2%, three year Treasury bond rate is 1.4% and four year Treasury bond rate is 1.9%.

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King’s Park, Trinidad is owned and operated by a private company,Windy Sports Ltd. You work as the Facilities Manager of the Park andthe CEO of the company has asked you to evaluate whether Windy shouldembark on the expansion of the facility given there are plans by theGovernment to host next cricket championship.The project seeks to increase the number of seats by building fournew box seating areas for VIPs and an additional 5,000 seats for thegeneral public. Each box seating area is expected to generate $400,000in incremental annual revenue, while each of the new seats for thegeneral public will generate $2,500 in incremental annual revenue.The incremental expenses associated with the new boxes and seatingwill amount to 60 percent of the revenues. These expenses includehiring additional personnel to handle concessions, ushering, andsecurity. The new construction will cost $15 million and will be fullydepreciated (to a value of zero dollars) on a straight-line basis overthe 5-year…

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Chapter 5, Problem 11PROB

Summary Introduction

Expectation theory:

Expectation theory is used to find forward interest rate based on the prevailing long term interest rates.

Calculate the forward rate as follows:

Forward rate=((Nthyear×Nthyear interest rate)−((N-1)thyear×(N-1)thyear interest rate))

Given two year Treasury bond rate is 1.2%, three year Treasury bond rate is 1.4% and four year Treasury bond rate is 1.9%.

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