Question: please give me correct answers Attempts Average / 4 S. St Interest Rates: Using the Vield Curve to estimate Future Interest Rates You can calculate

please give me correct answers please give me correct answers Attempts Average / 4 S. St Interest

Attempts Average / 4 S. St Interest Rates: Using the Vield Curve to estimate Future Interest Rates You can calculate the yield curve, given inflation and maturity-related risks. Looking at the yield curve, you can use the information embedded in it to estimate the market's expectations regarding future inflation, risk, and short-term interest rates. The pure expectations theory states that the shape of the yield curve depends on investors' expectations about future interest rates. The theory assumes that bond traders establish bond prices and interest rates strictly on the basis of expectations for future interest rates and that they are indifferent to maturity because they don't view long-term bonds as being riskier than short-term bonds. For example, assume that you had a 1-year T-bond that yields 1.2% and a 2-year T-bond that yields 2.5%. From this information you could determine what the yield on a 1-year T-bond one year from now would be. Investors with a 2-year horizon could invest in the 2-year T-band or they could invest in a 1-year T-bond today and a 1-year T-bond one year from today. Both options should yield the same result of the market is in equilibrium; otherwise, investors would buy and sell securities until the market was in equilibrium. Quantitative Problem Today, interest rates on 1-year T-bonds vield 1.2%, interest rates on 2-year T-bonds wield 2.5%, and interest rates on 5-year T-bonds yield 2A . If the pure expectations theory is correct, what in the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places bs. If the pure expectations theory is correct, what is the yield on 2 Year Tbonds one year from nowe sure to use a geometrie average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now! Be sure to use a geometrie average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!