Question

1a. Assume the current interest rate on a one-year Treasury bond (₁R₁) is 1.69 percent, the current rate on a two-year Treasury bond (₁R₂) is 1.85 percent, and the current rate on a three-year Treasury bond (₁R₃) is 1.96 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on T-bills during year 3 (E(₃r₁) or ₃f₁)? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Interest rate expected during year 3: __%

1b. How much money would you have to deposit today in order to have $3,000 in four years if the discount rate is 8 percent per year? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Amount of deposit:

Answer 1

1a. Assume the current interest rate on a one-year Treasury bond (₁R₁) is 1.69 percent, the current rate on a two-year Treasury bond (₁R₂) is 1.85 percent, and the current rate on a three-year Treasury bond (₁R₃) is 1.96 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on T-bills during year 3 (E(₃r₁) or ₃f₁)? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Interest rate expected during year 3: __%

(1 + 2 year treasury rate)^2 * (1 + one year rate in year 3) = (1 + 3 year rate)^3

(1 + 1.85%)^2 * (1 + one year rate in year 3) = (1 + 1.96%)^3

1.03734 * (1 + one year rate in year 3) = 1.05996

(1 + one year rate in year 3) = 1.0218

Interest rate expected during year 3: 2.18%

1b. How much money would you have to deposit today in order to have $3,000 in four years if the discount rate is 8 percent per year? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Future value = Deposit * (1 + Interest)^Years

3000 = Deposit * (1 + 0.08)^4

Deposit = 3000 / 1.36049

Deposit = $2205.09