Instruction: Answer the following items and show your solutions.

1. The current interest rate on a one-year bond is 9%, and you expect the interest rate on the one-year bond next year to be 11%. If the unbiased expectations theory is correct, what should the current rate be on two-year bonds?

2. 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 = 1% E(2r1) = 3.75% E(3r1) = 4.25% E(4r1) = 5.75%

Using the unbiased expectations theory, what should be the current rate for a four-year Treasury bill?

3. Suppose we observe the following rates: 1R1 = 9%, 1R3 = 10%, E(2r1) = 11%. If the unbiased expectationstheory of the term structure of interest rates holds, what is the one-year interest rate expected two years from now, E(3r1)?

4. One-year Treasury bills currently earn 1.45 percent. You expected that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities?

5. What is the future value of P5,000 invested on the last day of each 6 months for 8 years at 7 percent compounded semiannually?

6. How much would I have to deposit today in an account that pays 12% interest, compounded quarterly, to have a P20,000 in my account at the end of 10 years?