0 Course Modules: Busines x y MindTap-Cengage Lear/X (- ). ? . secure ! https://

Question

0 Course Modules: Busines x y MindTap-Cengage Lear/X (- ). ? . secure ! https://ng.cengage.com/static/nb/ui/indechtml?nbld-84 1770&nbNod; MINDTAP Ch 06: Assignment- Interest Rates Due on jun 17 at 1159 PM CDT m interest rates can be used to estimate future short-term interest rates Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now. O False O True The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has 7.0400% yeld. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? O 10.7730% 12.0015% ? 9.4500% 8.0325% on oneycar Treasury security the yeld is 4.6900% nnd 7.0400, on a two-year Treasury security Suppose the one-year sacurity does not have a maturity risk premium, but the tworyear security does and it is 0 2500% what is the market's estimate of the onerea. Treasury rete one year from. now O 20.1800% 7.5910% O 11.3410% O 8.9300% Suppose the yield on two-ysia. Trenery seunty is 5,83% and ths siele sera forysert ? 0.53% Type here to search

Explanation / Answer

1. false because it  assumes that the term structure of an interest contract only depends on the shorter term segments for determining the pricing and interest rate of longer maturities. It assumes that yields at higher maturities (such as that of 5,10, or 30 year bonds), correspond exactly to future realized rates, and are compounded from the yields on shorter maturities. In other words, buying a ten year bond is equal to buying two five year bonds in succession; you’re as safe in a ten-year as in a five-year bond.

2.  you need to apply the no arbitrage argument: "it should be indifferent for me either invest my money for 2 years at a rate of 7.04%, or invest for 1 year at 4.69% and then again for another year at X%.

Let's work out the X%
1.0469*(1+X) = (1.0704)^2

solving that for X:
X=(1.0704^2/1.0469) - 1
X = 9.45%

Hence, the correct option is "C"

3. First subtract 0.25% from 7.04% = 6.79% and then redo the calculation. This results in:

1.0469*(1+X) = (1.0679)^2

solving that for X:
X=(1.0679^2/1.0469) - 1
X = 8.93%

Hence, the correct option is "D"

4. similarly,

(1.0583^2)*[(1+X)^3] = (1.0620)^5

solving that for X:
X = [(1.0620^5) / (1.0583^2)]^(1/3)

X = 6.45%

Hence, the correct option is "B".

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