The term structure of interest rates is as follows: 1-year rate = 5.5% 2-year rate =...

Question

Question

The term structure of interest rates is as follows:

What does the market expect the one-year rate to be two years from today? Write your answer out to four decimals

Answer 1

Answer #1

Based on Pure Expectations Theory,

(1 + 3 Yr rate)³ = (1 + 2 Yr Rate)² * (1 + 1 Yr Rate 2 Yr from now)

(1 + 6.8%)³ = (1 + 6.2%)² * (1 + 1 Yr Rate 2 Yr from now)

1.218186 = 1.127844 * (1 + 1 Yr Rate 2 Yr from now)

(1 + 1 Yr Rate 2 Yr from now) = 1.080102

1 Yr rate 2 Yr from now = 0.080102 = 8.0102%

Answer 2

Similar Homework Help Questions

Given the following term structure of risk-free interest rates today, what would you expect the interest...

Given the following term structure of risk-free interest rates today, what would you expect the interest rate to be on a one year bond four years in the future? Enter your answer as a percent without the “%.” Round your final answer to two decimals. Maturity in Years Interest Rate 1 4.00% 2 4.50% 3 4.75% 4 5.00% 5 6.00%
Assume the current term structure of interest rates follows this table. Maturity in Years Rate 11...

Assume the current term structure of interest rates follows this table. Maturity in Years Rate 11 5% 2 6% 3 9% 4 10% What does the market expect the 1-year rate will be two years from now? A. None of the other options are correct B. 3.25% C. 15.26% D. 7.81% E. 9.00%
Assume the current term structure of interest rates follows this table. 11 Maturity in Years Rate...

Assume the current term structure of interest rates follows this table. 11 Maturity in Years Rate 5% 2 6% 3 9% 4 10% What does the market expect the 2-year rate will be one year from now? O A. 5.50% B. None of the other options are correct O c. 11.06% D. 9.50% E. 13.97%

Interest Rate Term Structure: *The term structure for zero-coupon bonds is currently is currently: ...

Interest Rate Term Structure: *The term structure for zero-coupon bonds is currently is currently: Maturity (years) YTM (%) 1 4.00% 2 5.00% 3 6.00% Under the Expectations Theory, what Forward Rate does the market expect to observe on 3-year zeros at the end of the year?
please solve for (c), the answer is 0.3020 structure for (annual effective) interest rates is as The term for corres...

please solve for (c), the answer is 0.3020 structure for (annual effective) interest rates is as The term for corresponding maturities: 8-1 follows 5%, 2 year: 10%, 3 year: 15%, 4 year: 20% 1 ycar he swap rate for a 4-year interest rate swap of floating : 5%, Find the swap ra erest for fixed rate interest if the notional amount is level for the four year swap tenor. Suppose that the notional amount is $1,000,000 for the first ears...
Suppose the term structure of interest rates has these spot interest rates: r1 = 6.5%. r2...

Suppose the term structure of interest rates has these spot interest rates: r1 = 6.5%. r2 = 6.3%, r3 = 6.1%, and r4 = 5.9%. a. What will be the 1-year spot interest rate in three years if the expectations theory of term structure is correct? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) 1-year spot in 3 years % b. If investing in long-term bonds carries additional risks, then how would...

The one-year, two-year, three-year, and four-year spot rates for the theoretical spot rate curve are 5.0%,...

The one-year, two-year, three-year, and four-year spot rates for the theoretical spot rate curve are 5.0%, 6.0%, 6.5%, and 7%, respectively. According the expectations theory for the term structure of interest rates, what is the expected 2-year interest rate 2 years from today? Assume annual compounding.
Suppose the term structure of interest rates has these spot interest rates: rı = 5.00%, r2...

Suppose the term structure of interest rates has these spot interest rates: rı = 5.00%, r2 = 5.40%, r3 = 5.70%, r4 = 5.90% and r5 = 6.00%. a. What will be the 1-year spot interest rate in three years if the expectations theory of term structure is correct? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) 1-year spot in 3 years b. If investing in long-term bonds carries additional risks, then...
Analysts predict that short-term interest rates over the next 4 years will be as follows: 1.5%,...

Analysts predict that short-term interest rates over the next 4 years will be as follows: 1.5%, 5.5%, 8%, and 3.5%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____. Group of answer choices 5.5%; 4.63% 5.5%; 4.25% 5%; 4.63% 5%; 4.25%

Consider the expectations theory of the term structure. Assuming that the short-term (1 period) interest rate...

Consider the expectations theory of the term structure. Assuming that the short-term (1 period) interest rate today is 2 percent, and that the short- term (1 period) interest rates are expected to be 3 percent and 4 percent in the next years, what is the 3-period interest rate today? O2 percent 5 percent 3 percent 09 percent