Question

Click here to read the eBook: Using the Yield Curve to Estimate Future Interest Rates EXPECTATIONSS THEORY Assume that the real risk-free rate is 2.3% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 6.49% and a 2-year Treasury bond yields 6.7% . Calculate the yield using a geometric average. a. What is the 1-year interest rate that is expected for Year 2? Do not round intermediate calculations. Round your answer to two decimal places. b. What inflation rate is expected during Year 27 Do not round intermediate calculations. Round your answer to two decimal places. c. Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2. I The difference is due to the inflation rate reflected in the two interest rates. The inflation rate reflected in the interest rate on any security is the average rate of inflation expected over the security's life. II. The difference is due to the real risk-free rate reflected in the two interest rates. The real risk-free rate reflected in the interest rate on any security is the average real risk-free rate expected over the security's life. II. The difference is due to the fact that the maturity risk premium is zero. IV. The difference is due to the fact that we are dealing with very short-term bonds. For longer term bonds, you would not expect an interest rate differential. ged Float v. The difference is due to the fact that there is no liquiditty risk premium. AD Select d Float

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

BOND - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = B- A E E E Wrap Text FMerce Merge & Center - Center B I U s $ -% % 4.0 .00 . Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Font E Copy Paste Format Painter Clipboard - P Alignment Number Cells Y428 O fic Q R TU V AA AB Я 418 YIELD ON 2 YEAR TREASURY BOND YIELD ON 1 YEAR TREASURY BOND 6.70% 1R2 6.40% 1R1 1 YEAR RATES 1 YEAR FROM NOW = 2f1 419 420 421 422 423 424 425 426 427 428 2f1 = (1+1R2)^2/(1+1R1)^1 -1 = ((1+0.067)^2/(1+0.064)^1)-1 = 7.00% EXPECTED INFLATION RATE IN YEAR 1 YIELD ON 1 YEAR TREASURY BOND = 6.4% = 429 r* + IP 2.3% + IP 4.10% IP = 430 431 432 433 EXPECTED INFLATION RATE IN YEAR 2 RATE OF INTEREST IN YEAR 2 = 7.00% = IP = r* + IP 2.3% + IP 434 435 4.70 4.70% 436 437 I THE DIFFERENCE IS DUE TO INFLATION RATE REFLECTED IN TWO INTEREST RATES ► Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATIONWARRANT refund 0 YIELD SPOT 1 ferences S4 S5 S6 BOU 120% 0 -_ Rea -_ + ELEB * * OENG 30-10-2019