Question

In: Economics

2. Suppose that the current and expected future short-term interest rates are given by: it =...

2. Suppose that the current and expected future short-term interest rates are given by: it = 0:05 ie t+3 = 0:03 ie t+1 = 0:05 ie t+4 = 0:03 ie t+2 = 0:04 And suppose that the liquidity premiums on bonds with maturity on 1 through 3 years are: l1t = 0:00 l4t = 0:02 l2t = 0:01 l5t = 0:025 l3t = 0:015 (a) Find the yields on the 2-, 3-, 4-, and 5-year bonds implied by the expectations theory. (b) Find the yields on the 2-, 3-, 4-, and 5-year bonds implied by the liquidity premium theory. (c) Plot the yield curves that are implied by the expectations and liquidity preference theories.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...
1. Suppose the data on today’s and future expected interest rates is given: Time Yield on 1-year T-bond Today 1.2% Next year 1.2% (expected) 2 years from today 1.6% (expected) 3 years from today 2.0% (expected) a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have? b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds...
1. Suppose the data on today’s and future expected interest rates is given: Time Yield on...
1. Suppose the data on today’s and future expected interest rates is given: Time Yield on 1-year T-bond Today 1.2% Next year 1.2% (expected) 2 years from today 1.6% (expected) 3 years from today 2.0% (expected) a) Calculate today’s interest rates on 2-year, 3-year and 4-year bonds using the expectations hypothesis. Use these yields to construct a yield curve and plot it. What kind of shape does it have? b) Now, suppose term premiums for 2-year, 3-year and 4-year bonds...
The table below shows current and expected future​ one-year interest​ rates, as well as current interest...
The table below shows current and expected future​ one-year interest​ rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year ​One-Year Bond Rate Multiyear Bond Rate 1 2.00​% 2.00​% 2 3.00​% 5.00​% 3 4.00​% 7.00​% 4 5.00​% 8.00​% 5 6.00​% 10.00​% The liquidity premiums for each year are given​ as: ​(Enter your responses rounded to two decimal​ places.) l11 = ​% l21 = ​% l31 = ​%...
With the Expectations Theory, explain what happens to long term interest rates when future short term...
With the Expectations Theory, explain what happens to long term interest rates when future short term interest rates are expected to (a) fall and (b) increase.
Suppose firms expect future output to be higher and future interest rates to be higher. Given...
Suppose firms expect future output to be higher and future interest rates to be higher. Given this information, how will firms alter investment in the current period? Explain.
If expectations of future short term interest rates suddenly fell, what would happen to the slope...
If expectations of future short term interest rates suddenly fell, what would happen to the slope of the yield curve according to the preferred habitat theory of the term structure of interest rates? Explain fully. with graph if it has, please!
Answer the following, a. If expectations of future short-term interest rates suddenly increased, what would happen...
Answer the following, a. If expectations of future short-term interest rates suddenly increased, what would happen to the slope of the yield curve? b. In the last 10 years, inflation and interest rates have become less volatile, what would you expect to see happen to the slope of the yield curve? In the space below draw, the yield curve showing how it will change.
1.Given a term structure of interest rates, derive the spot rates projected for years 1, 2,...
1.Given a term structure of interest rates, derive the spot rates projected for years 1, 2, ….n, T T period Bond Yield to mat. (zero coupon) Implied spot rates 1 6.0 2 6.7 3 7.0 4 7.5 5 7.6 Compute your spot rates. Explain why it is important that we use zero coupon bonds. 2.Given an n year zero coupon bond, compute the modified duration. 3. Introduction to risk free pricing. Compute the risk free pricing of a call option...
Suppose there is a simultaneous reduction in the expected future interest rate and increase in future...
Suppose there is a simultaneous reduction in the expected future interest rate and increase in future expected output. This will cause which of the following to occur? 1 The IS curve to shift left in the current period 2 The IS curve to shift right in the current period 3 The LM curve to shift up in the current period 4 The LM curve to shift down in the current period
Suppose the term structure of​ risk-free interest rates is as shown​ below: Term 1 yr 2...
Suppose the term structure of​ risk-free interest rates is as shown​ below: Term 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr Rate​ (EAR ​%​) 1.92 2.35 2.61 3.22 3.85 4.39 5.09 a. Calculate the present value of an investment that pays $1,000 in two years and $4,000 in five years for certain. b. Calculate the present value of receiving $100 per​ year, with​ certainty, at the end of the next five years. To find...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT