Question

1. 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

2. The yield on a one-year Treasury security is 4.0000%, and the two-year Treasury security has a 4.8000% 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? (Note: Do not round your intermediate calculations.)

4.7653%

6.3911%

5.6062%

7.1199%

3. Recall that on a one-year Treasury security the yield is 4.0000% and 4.8000% 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 0.5%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

4.6009%

3.9108%

5.245%

5.8431%

4. 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.)

6.53%

5.46%

6.45%

6.61%

Answer 1

1)

Securities returns are based on the interest rates. Unbiased theory of interest rates will equal the interest rates of different maturity period, irrespective of their holding period return.

Hence, given statement is True.

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