Question

#1: The wall Street Journal reports that the rate on four-year Treasury securities is 3.45 percent and the rate on five-year Treasury securities is 4.10 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury rate to be four years from today, E(5r1)? #2: A recent edition of The Wall Street Journal reported interest rates of 3.10 percent, 3.45 percent, 3.76 percent, and 3.02 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory of the term structure of interest rates, what are the expected one-year rates during years 4, 5, and 6? #3: Calculate the future value in five years of $15,000 received today if your investments pay a. 3 percent compounded annually b. 4 percent compounded annually c. 7 percent compounded annually d. 7 percent compounded semiannually e. 7 percent compounded quarterly What do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year? #4: Calculate the present value of the following annuity streams a. $5,000 received each year for 5 years on the last day of each year if your investments pay 4.25 percent compounded annually b. $5,000 received each quarter for 5 years on the last day of each quarter if your investments pay 4.25 percent compounded quarterly c. $5,000 received each year for 5 years on the first day of each year if your investments pay 4.25 percent compounded annually d. $5,000 received each quarter for 5 years on the first day of each quarter if your investments pay 4.25 percent compounded quarterly

Answer 1

Answer:

1)

Rate of four year treasury bond R=3.45%

Rate of five year treasury bond R=4.10%

Expected interest rate for one year treasury bond from four year today= (1+4.1%)^5/(1+3.45%)^4 - 1=6.74%