Project #41491 - Chapter 6

The Wall Street Journal reports that the rate on 3-year Treasury securities is 1.50 percent and the rate on 5-year Treasury securities is 2.45 percent. According to the unbiased expectations hypothesis, what does the market expect the 2-year Treasury rate to be three years from today, E(3r2)? (Do not round intermediate calculations and round your answer to 2 decimal places.)

 

 

A particular security’s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.90 percent and the real interest rate is 3.80 percent. The security’s liquidity risk premium is 0.10 percent and maturity risk premium is 0.70 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. (Round your answer to 2 decimal places.)

 

 

 

 

 

 

A recent edition of The Wall Street Journal reported interest rates of 2.75 percent, 3.10 percent, 3.48 percent, and 3.75 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what are the expected 1-year forward rates for years 4, 5, and 6? (Do not round intermediate calculations and round your answers to 2 decimal places.

 

 

 

One-year Treasury bills currently earn 1.30 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.50 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.)

 

 

 

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:
             1R1 = 9%,  E(2r1) = 10%, E(3r1) = 10.6%, E(4r1) = 10.95%

Using the unbiased expectations theory, calculate the current (long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury securities. 

 

Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 6.15 percent. The expected inflation premium is 1.10 percent annually and the real interest rate is expected to be 2.30 percent annually over the next ten years. The liquidity risk premium on Nikki G’s bonds is 0.35 percent. The maturity risk premium is 0.20 percent on 3-year securities and increases by 0.03 percent for each additional year to maturity. Calculate the default risk premium on Nikki G’s 10-year bonds. (Round your answer to 2 decimal places.)

 

 

 

 

Tom and Sue’s Flowers, Inc.’s, 10-year bonds are currently yielding a return of 9.00 percent. The expected inflation premium is 3.00 percent annually and the real interest rate is expected to be 3.45 percent annually over the next 10 years. The default risk premium on Tom and Sue’s Flowers’ bonds is 0.80 percent. The maturity risk premium is 0.75 percent on 5-year securities and increases by 0.06 percent for each additional year to maturity. Calculate the liquidity risk premium on Tom and Sue’s Flowers, lnc.’s, 10-year bonds. (Round your answer to 2 decimal places.)

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Due By (Pacific Time) 09/28/2014 10:44 pm
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