Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 6, Problem 6.2WUE
The yields for Treasuries with differing maturities on a recent day were as shown in the table below.
| Maturity | Yield |
| 3 months | 1.41% |
| 6 months | 1.71 |
| 2 years | 2.68 |
| 3 years | 3.01 |
| 5 years | 3.70 |
| 10 years | 4.51 |
| 30 years | 5.25 |
- a. Use the information to plot a yield curve for this date.
- b. If the expectations hypothesis is true, approximately what
rate of return do investors expect a 5-year Treasury note to pay 5 years from now? - c. If the expectations hypothesis is true, approximately what rate of return do investors expect a 1-year Treasury security to pay starting 2 years from now?
- d. Is it possible that even though the yield curve slopes up in this problem, investors do not expect rising interest rates? Explain.
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Students have asked these similar questions
As of November 14, 2023, Treasury yields were as follows:
1-year 5.24%
2-year 4.80%
3-year 4.56%
5-year 4.42%
10-year 4.44%
30-year 4.61%
Use these yields to answer the questions below.
a. What do the rates above imply about the shape of the yield curve? Explain.
b. Using the pure expectations theory of the term structure of interest rates, carefully explain how the general shape of the yield curve described in (a) could come about.
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to
estimate future short-term interest rates.
Based on the pure expectations theory, is the following statement true or false?
A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in
another one-year CD after one year
True
False
The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% yield.
Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate
one year from now?
14.3637%
9.6135%
11.3100%
12.8934%
Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% on a two-year Treasury security.
Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is
0.2000%. What is the market's estimate of the one-year Treasury rate one year from now?
12.4260%…
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.
Q. Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)
a. 6.45%
b. 6.69%
c. 5.46%
d. 6.61%
Chapter 6 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 6.1 - What is the real rate of interest? Differentiate...Ch. 6.1 - What is the term structure of interest rates, and...Ch. 6.1 - For a given class of similar-risk securities, what...Ch. 6.1 - Prob. 6.4RQCh. 6.1 - List and briefly describe the potential issuer-...Ch. 6.2 - What are typical maturities, denominations, and...Ch. 6.2 - Differentiate between standard debt provisions and...Ch. 6.2 - How is the cost of bond financing typically...Ch. 6.2 - Prob. 6.9RQCh. 6.2 - Prob. 6.10RQ
Ch. 6.2 - Compare the basic characteristics of Eurobonds and...Ch. 6.3 - Why is it important for financial managers to...Ch. 6.3 - Prob. 6.13RQCh. 6.3 - Prob. 6.14RQCh. 6.3 - Prob. 6.15RQCh. 6.4 - Prob. 6.16RQCh. 6.4 - What relationship between the required return and...Ch. 6.4 - If the required return on a bond differs from its...Ch. 6.4 - As a risk-averse investor, would you prefer bonds...Ch. 6.4 - What is a bonds yield to maturity (YTM)? Briefly...Ch. 6 - Learning Goals 5, 6 ST6- 1 Bond valuation Lahey...Ch. 6 - Learning Goal 1 E6-1 The nominal, risk-free rate...Ch. 6 - The yields for Treasuries with differing...Ch. 6 - The YTMs for Treasuries with differing maturities...Ch. 6 - Assume that the rate of inflation expected over...Ch. 6 - Calculate the risk premium for each of the...Ch. 6 - You have two assets and must calculate their...Ch. 6 - Prob. 6.7WUECh. 6 - Assume a 5-year Treasury bond has a coupon rate of...Ch. 6 - Interest rate fundamentals: The real rate of...Ch. 6 - Prob. 6.2PCh. 6 - Prob. 6.3PCh. 6 - Yield curve A firm wishing to evaluate interest...Ch. 6 - Term structure of interest rates The following...Ch. 6 - Bond interest payments before and after taxes...Ch. 6 - Prob. 6.11PCh. 6 - Prob. 6.13PCh. 6 - Prob. 6.14PCh. 6 - Bond valuation: Annual interest Calculate the...Ch. 6 - Prob. 6.20PCh. 6 - Bond valuation: Semiannual interest Find the value...
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