Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury...

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Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve: 10-year bond rate=1.08%; 20-year bond rate = 1.64% a. Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why Expected 10-year bond rate 10 years from now = (Be sure to show your work here). Rate are expected to because b. For the same above if there is a liquidity premium of 0.08% for a 10-year bond and 0.20% for a 20-year bond, under the liquidity premium theory (adjusting for 4 liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why. Rates Expected to Expected Rate with LP (Be sure to show your work here). c. Explain how interest rates are determined under the market segmentation theory What is the flaw in this theory? Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve: 10-year bond rate=1.08%; 20-year bond rate = 1.64% a. Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why Expected 10-year bond rate 10 years from now = (Be sure to show your work here). Rate are expected to because b. For the same above if there is a liquidity premium of 0.08% for a 10-year bond and 0.20% for a 20-year bond, under the liquidity premium theory (adjusting for 4 liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why. Rates Expected to Expected Rate with LP (Be sure to show your work here). c. Explain how interest rates are determined under the market segmentation theory What is the flaw in this theory?

Answer rating: 100% (QA)

a According to the expectations theory the expected 10year bond rate forward rate 10 years from now is simply the geometric average of the current spo... View the full answer