Term Structure A 1-year Treasury bill currently offers a 4% rate of return
Term Structure A 1-year Treasury bill currently offers a 4% rate of return. A 2-year Treasury note offers a 4.5% rate of return. Under the expectations theory, what rate of return do investors expect a 1-year Treasury bill to pay next year?
The rate of return investors expect a 1-year Treasury bill to pay next year is _______ %. (Round to two decimal places.)
Homework Answers
Let I% be the rate that is to be paid next year, then
(1+0.04) * (1+ i ) = (1+0.045)^2
(1.04) * (1+ i ) = (1.045)^2
1+i = 1.045^2 / 1.04 = 1.0500
I = 1.05 - 1 = 0.05 = 5%
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Term Structure A 1-year Treasury bill currently offers a 4% rate of return
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Round your answers to 2 decimal
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Suppose that the current 1-year rate (1-year spot
rate) and expected 1-year T-bill rates over the following three
years (i.e., years 2, 3, and 4, respectively) are as follows:
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E(2r1) = 4.60%,
E(3r1) = 5.10%,
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Using the unbiased expectations theory, calculate the current
(long-term) rates for one-, two-, three-, and four-year-maturity
Treasury securities. (Do not round intermediate calculations.
Round your answers to 2 decimal
places.)
Year Current (Long-Term) Rates
1 _____.__%
2 _____.__%
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