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Category > Business & Finance Posted 04 May 2017 My Price 5.00

The interest rate on one-year Treasury bonds is 0.4

The interest rate on one-year Treasury bonds is 0.4 percent, the rate on two-year T-bonds is 0.8 percent, and the rate on three-year T-bonds is 1.1 percent. Using the expectations theory, compute the expected one-year interest rates in (a) the second year (Year 2 only) and (b) the third year (Year 3 only).

 

 

 

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Alpha Geek
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Status NEW Posted 04 May 2017 08:05 AM My Price 5.00

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file 1493888419-Answer.docx preview (57 words )
T-----------he -----------int-----------ere-----------st -----------rat-----------e o-----------n o-----------ne------------yea-----------r T-----------rea-----------sur-----------y b-----------ond-----------s i-----------s 0-----------.4 -----------per-----------cen-----------t, -----------the----------- ra-----------te -----------on -----------two------------ye-----------ar -----------T-b-----------ond-----------s i-----------s 0-----------.8 -----------per-----------cen-----------t, -----------and----------- th-----------e r-----------ate----------- on----------- th-----------ree------------ye-----------ar -----------T-b-----------ond-----------s i-----------s 1-----------.1 -----------per-----------cen-----------t. -----------Usi-----------ng -----------the----------- ex-----------pec-----------tat-----------ion-----------s t-----------heo-----------ry,----------- co-----------mpu-----------te -----------the----------- ex-----------pec-----------ted----------- on-----------e-y-----------ear----------- in-----------ter-----------est----------- ra-----------tes----------- in----------- (a-----------) t-----------he -----------sec-----------ond----------- ye-----------ar -----------(Ye-----------ar -----------2 o-----------nly-----------) a-----------nd -----------(b)----------- th-----------e t-----------hir-----------d y-----------ear----------- (Y-----------ear----------- 3 -----------onl-----------y).----------- Â----------- An-----------swe-----------r -----------(a)----------- (-----------1+0-----------.4%-----------)(1-----------+x%-----------)=(-----------1+0-----------.8%-----------)^2----------- t-----------hat----------- is----------- (1-----------+0.-----------004-----------)(1-----------+x)-----------=(1-----------+0.-----------008-----------)^2----------- 1-----------+x=-----------1.0-----------120-----------159-----------362-----------5 -----------x=0-----------.01-----------201-----------593-----------625----------- =-----------1.2-----------015-----------936-----------25%-----------
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