4. Jenny has a four-year variable rate loan of $5,000. The loan will accumulate interest at...
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4. Jenny has a four-year variable rate loan of $5,000. The loan will accumulate interest at the annual effective rate of a 1-year Treasury bond reset annually in advance each year (meaning the first rate is today's rate). Jenny won't make any payments on the loan until the end. Using the market's expectation of future interest rates (i.e., 1-year forwards), how much is Jenny expected to owe on the loan in four years? All rates below are annual effective rates. Price today of a 1-year Treasury bond = 95.465 (zero coupon bond) Rate on a 2-year, zero Treasury bond = 4.20% 3-year spot rate = 3.83% f(3,4) the 1-year forward rate three years in the future = 3.00% 4. Jenny has a four-year variable rate loan of $5,000. The loan will accumulate interest at the annual effective rate of a 1-year Treasury bond reset annually in advance each year (meaning the first rate is today's rate). Jenny won't make any payments on the loan until the end. Using the market's expectation of future interest rates (i.e., 1-year forwards), how much is Jenny expected to owe on the loan in four years? All rates below are annual effective rates. Price today of a 1-year Treasury bond = 95.465 (zero coupon bond) Rate on a 2-year, zero Treasury bond = 4.20% 3-year spot rate = 3.83% f(3,4) the 1-year forward rate three years in the future = 3.00%
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