(d) Suppose the Federal Reserve issues a forward guidance policy stating that they expect interest rates...

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(d) Suppose the Federal Reserve issues a forward guidance policy stating that they expect interest rates to move within a narrow band over the next 5 years. In other words they anticipate them staying constant. You notice that the bond prices change to the following within a few hours of the announcement. Time To Maturity Price 6 mos 1 yr 2 yr $992.09 $979.43 $957.41 $928.60 4 yr $891.95 5 yr $858.43 Recalculate the yield to maturity for the bond of each maturity length. Graph the implied forward rates, and the implied interest rate expectations over the next few years (NOTE they're staying constant). What is the implied liquidity premium for each horizon? (You may assume the liquidity premium for the 1 year length bond is zero since there is no forward rate - which might imply something about the liquidity premium for even shorter term securities) 3 yr (d) Suppose the Federal Reserve issues a forward guidance policy stating that they expect interest rates to move within a narrow band over the next 5 years. In other words they anticipate them staying constant. You notice that the bond prices change to the following within a few hours of the announcement. Time To Maturity Price 6 mos 1 yr 2 yr $992.09 $979.43 $957.41 $928.60 4 yr $891.95 5 yr $858.43 Recalculate the yield to maturity for the bond of each maturity length. Graph the implied forward rates, and the implied interest rate expectations over the next few years (NOTE they're staying constant). What is the implied liquidity premium for each horizon? (You may assume the liquidity premium for the 1 year length bond is zero since there is no forward rate - which might imply something about the liquidity premium for even shorter term securities) 3 yr

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To calculate the yield to maturity for the bonds of different maturity lengths after the Federal Res... View the full answer