ZuoTi.Pro
Question

Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%. Assuming the pure expectation...

Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?

a. 7.36%
b. 7.75%
c. 8.16%
d. 8.59%
e. 9.04%
business   finance   
1 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1
Let Face Value of bond = 1
value of 1-year bond , reinvested after one year , at the end of year 2
= value of 2-year bond at the end of year 2

=> 1*(1+0.05)(1+k) = 1*(1+0.07)^2 (where, k = rate of 1-year bond at year 1)
=> k = 0.0938 = 9.38% = 9.04% (approx.)

Hence, ANSWER is OPTION (e)
1 0
Add a comment
Know the answer?
Add Answer to:
Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%. Assuming the pure expectation...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Suppose the interest rate on a 2-year T-bond is 6.0% and that on a 3-year T-bond...

    Suppose the interest rate on a 2-year T-bond is 6.0% and that on a 3-year T-bond is 7.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 2 year from now? 7.36% 7.75% 8.16% 9.03% 10.03%

  • Problem 2 Estimating Future Interest Rates (10 points) Suppose the interest rate on a 1-year T-bond...

    Problem 2 Estimating Future Interest Rates (10 points) Suppose the interest rate on a 1-year T-bond is 4.00% and that on a 3-year T-bond is 0.9070- Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates 1 year from now? (10 points)

  • The interest rate on a 1-year T-bond is 4.00% and that on a 2-year T-bond is...

    The interest rate on a 1-year T-bond is 4.00% and that on a 2-year T-bond is 5.90%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now? From the previous Q, the interest rate on a 1-year T-bond is 4.00%, on a 2-year T-bond is 5.90%, and on a one year bond one year from now is 7.834%. What would you do if the 2 year T-bond was at 5.7% not...

  • Suppose the interest rate on a 1-year T-bond is 1.75% and that on a 2-year T-bond...

    Suppose the interest rate on a 1-year T-bond is 1.75% and that on a 2-year T-bond is 4.25%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.25% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now? a. 2.50% b. 3.40% c. 4.67% d. 6.30% e. 6.85%

  • help with 15, 16, 17 15. Suppose the interest rate (return rate) on a 1-year T-bond...

    help with 15, 16, 17 15. Suppose the interest rate (return rate) on a 1-year T-bond is 3.0% and that on a 2-year T-bond is 6.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now? 16. Stacker's Corporation's bonds have a 10-year maturity, a 10.00% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 2.00%, based on semiannual compounding. What is the bond's price? 17....

  • What is the markets forecast?

    Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.6%.  Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?Answers could be 9.03, 12.83,10.57,12.52, 10.26

  • Problem 3: (3 points) Suppose the interest rate on a 1-year T-bill is 5.0% and that...

    Problem 3: (3 points) Suppose the interest rate on a 1-year T-bill is 5.0% and that on a 2-year T-note is 6.0%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1- year T-bill but 0.4% for a 2-year note. What is the equilibrium market forecast for 1-year rates 1 year from now?

  • ) Suppose the interest rate on a 1-year T-bond is 3.00% and that on a 2-year...

    ) Suppose the interest rate on a 1-year T-bond is 3.00% and that on a 2-year T-bond is 4.10%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond. What is the yield on a 1-year T-bond expected to be one year from now

  • 12. Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 4.80%. A...

    12. Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 4.80%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond. What is the yield on a 1-year T-bond expected to be one year from now? why we subtract the MRB from interest rate 1-year T-bind ??

  • The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used...

    The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now. False True The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury security has a 8.0700% yield....

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT