1 answer

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return...

Question:

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securiti

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securiti
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) erest Rate 1-year T-bill at beginning of year 1 1-year T-bill at beginning of year 2 1-year T-bill at beginning of year 3 1-year T-bill at beginning of year 4 - Expected Return 2-year security 5-year security 4-year security < Prev 9 of 20 Next >
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data (Input your answers as a percent rounded to 2 decimal places.) Interest Rate 1-year T-bil at beginning of year 1 1-year T.bill at beginning of year 2 1-year T- b lot beginning of year) 1-year T-bill at beginning of year 4 Expected Return 2-year security 3-year security 4-year security

Answers

Given,

1 year rate at beginning of year 1, f(0,1) = 6%

1 year rate at beginning of year 2, F(0,1,2) = 7%

1 year rate at beginning of year 3, F(0,2,3) = 10%

1 year rate at beginning of year 4, F(0,3,4) = 11%

to calculate, f(0,2) = ((1+f(0,1))*(1+F(0,1,2)))^(1/2) - 1 = (1.06*1.07)^0.5 - 1 = 6.5%

F(0,3) = (((1+f(0,2))^2)*(1+F(0,2,3)))^(1/3) - 1 = ((1.065^2)*1.1)^(1/3) - 1 = 7.65%

F(0,4) = (((1+f(0,3))^3)*(1+F(0,3,4)))^(1/4) - 1 = ((1.0765^3)*1.11)^(1/4) - 1 = 8.48%

.

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