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Using the Yield Curve to Estimate Future Interest Rates You can calculate the yield curve, given...

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Using the Yield 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 markets expectations regarding future inflation, risk, and short-term interest rates. The pure expectations 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 dont view long-term bonds as being riskier than short-term bonds. For example, assume that you had a 1-year T-bond that yields 1.6% and a 2-year T-bond that yields 2.15%. 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-bond 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 if 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 yield 1.6%, interest rates on 2-year T-bonds yield 2.15%, and interest rates on 3-year T-bonds yield 3.3% theory states that the a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations Show All Feedback b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations Show All Feedbackc. 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 geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. Show All Feedback

Using the Yield 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 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 1.6% and a 2-year T-bond that yields 2.15%. 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-bond 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 if 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 yield 1.6%, interest rates on 2-year T-bonds yield 2.15%, and interest rates on 3-year T-bonds yield 3.3% theory states that the a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations Show All Feedback b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations Show All Feedback
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 geometric average in your calculations. Round your answer to four decimal places. Do not round intermediate calculations. Show All Feedback
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SEE THE SCREENSHOT. ANY DOUBTS, HAPPY TO HELP YOU. THANK YOU. THUMBS UP PLEASE.

Home nert Page Layout Formulas Data Review View dd-Ins Cut E AutoSum Wrap Text aCopy B l u. ,_a.</p><p>Ars-函Merge & Center, $, % , 弼,8 C Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Editing Format Painter Clipboard EY244 EP Alignment Number Cells EQ ER ES ET EU EV EW EX EY EZ FA FB FC FD 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 ANSWER PURE EXPECTATIONS THEORY YEAR RATES SYMBOL 1.60% 1R1 2.15% 1R2 3.30% 1R3 (1+1R2)A2/(1+1R1)A1-1 ((1+1R3)A3/(1+1R1)A1)A(1/2)-1 ((1+0.033)A3/(1+0.016)A1)A(1/2) -1 (1+1R3)A3/(1+1R2)A2-1 ANSWERS 2.7030% 4. 1 606% 5.639096 ((1+0.0215)A2/(1+0.016) 1) -1 ((1+0.033)A3/(1+0.0215)A2) -1 YIELD SPOT Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP I MR INFLATION YIELD WARRANT fund bond -CLEAN INVOICE PRICE LI 04:12 17-01-2019

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