Question
Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.50 percent, and the 6-year Treasury rate is 7.75 percent. From discussions with your broker, you have determined that expected inflation premium is 3.00 percent next year, 3.25 percent in Year 2, and 3.45 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.75 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security?
All of the following are secondary market transactions except ___________.
Determinants of Interest Rate for Individual Securities A Corporation's 20-year bonds have an equilibrium rate of return is 9.00 percent. For all securities, the inflation risk premium is 1.62 percent and the real interest rate is 3.37 percent. The security's liquidity risk premium is .42 percent and maturity risk premium is .87 percent. The security has no special covenants. What is the bond's default risk premium?
2.72%
Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next yearE(2r1)to be 4 percent, and the expected 1-year rate the following yearE(3r1)to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasurysecurity rate, 1R1? (Round your answer to 2 decimal places.
On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:
1R1 = 4.55%, 1R2 = 4.75%, 1R3 = 5.25%, 1R4 = 5.95%
Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.
Year 1: 4.95%; Year 2: 6.26%; Year 3: 8.08%
The Wall Street Journal reports that the rate on 9-year Treasury securities is 1.30 percent and the rate on 10-year Treasury securities is 1.85 percent. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be nine years from today, E(10r1)? (Do not round intermediate calculations and round your answer to 2 decimal places.)
Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 5.50 percent. Over the next two years, the real interest rate is expected to be 3.05 percent per year and the inflation premium is expected to be 2.05 percent per year. What is the maturity risk premium on the 2-year Treasury security?
A recent edition of The Wall Street Journal reported interest rates of 11.25 percent, 11.60 percent, 11.98 percent, and 12.25 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what are the expected 1-year forward rates for years 4, 5, and 6? (Do not round intermediate calculations and round your answers to 2 decimal places.)
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.60 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 3.05%
Default risk premium = 2.85%
Liquidity risk premium = 1.25%
Maturity risk premium = 2.60%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
.55% .30% 1.00% .75% Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.50 percent, and the 6-year Treasury rate is 7.75 percent. From discussions with your broker, you have determined that expected inflation premium is 3.00 percent next year, 3.25 percent in Year 2, and 3.45 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.75 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security? .55% .30% 1.00% .75% Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 5.70% E(r2) = 6.80% L2 = .50% E(r3) = 7.00% L3 = .53% E(r4) = 7.20% L4 = .55% Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security? 7.0669% 6.6750% 7.2000% 7.7500% Forecasting Interest Rates You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, 2f1? 7.51% 5.625% 1.19% 1.01% All of the following are secondary market transactions except ___________. The Magellan Fund buys $100 million of Apple previously issued bonds All-State Insurance Co. sells $5 million in IBM bonds GE sells $30 million of new preferred stock Microsoft sells $2 million of IBM preferred stock out of its marketable securities portfolio Determinants of Interest Rate for Individual Securities A Corporation's 20-year bonds have an equilibrium rate of return is 9.00 percent. For all securities, the inflation risk premium is 1.62 percent and the real interest rate is 3.37 percent. The security's liquidity risk premium is .42 percent and maturity risk premium is .87 percent. The security has no special covenants. What is the bond's default risk premium? 1.80% 15.28% 3.06% 2.72% Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year??E(2r1)??to be 4 percent, and the expected 1-year rate the following year??E(3r1)??to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasurysecurity rate, 1R1? (Round your answer to 2 decimal places. On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: 1R1 = 4.55%, 1R2 = 4.75%, 1R3 = 5.25%, 1R4 = 5.95% Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX. Year 1: 4.95%; Year 2: 7.26%; Year 3: 8.08% Year 1: 3.75%; Year 2: 6.02%; Year 3: 9.00% Year 1: 3.65%; Year 2: 6.32%; Year 3: 11.08% Year 1: 4.95%; Year 2: 6.26%; Year 3: 8.08% The Wall Street Journal reports that the rate on 9-year Treasury securities is 1.30 percent and the rate on 10-year Treasury securities is 1.85 percent. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be nine years from today, E(10r1)? (Do not round intermediate calculations and round your answer to 2 decimal places.) Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 5.50 percent. Over the next two years, the real interest rate is expected to be 3.05 percent per year and the inflation premium is expected to be 2.05 percent per year. What is the maturity risk premium on the 2-year Treasury security? 1.00% .40% 1.10% 5.10% Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1 = 5%, E(2r1) = 6%, E(3r1) = 6.7%, E(4r1) = 7.05% Using the unbiased expectations theory, calculate the current (long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury securities. (Round your answers to 2 decimal places.) Year Current (Long-term) Rates 1 % 2 % 3 % 4 % A recent edition of The Wall Street Journal reported interest rates of 11.25 percent, 11.60 percent, 11.98 percent, and 12.25 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what are the expected 1-year forward rates for years 4, 5, and 6? (Do not round intermediate calculations and round your answers to 2 decimal places.) Years Forward rates 4 % 5 % 6 % Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.60 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 3.05% Default risk premium = 2.85% Liquidity risk premium = 1.25% Maturity risk premium = 2.60% What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds? .55% and 10.30%, respectively .55% and 2.06%, respectively .55% and 9.75%, respectively 3.60% and 13.35%, respectively
Explanation / Answer
Inflation premium is 3% for first year, 3.25% for second year and 3.45% thereafter.
Average Inflation rate =(3% + 3.25% + 3.45%x4)/6
=3.34%
Real Interest rate =3.75%
Interest rate on Treasury bond = real interest rate +average inflation premium + maturity risk premium
7.75% = 3.75% + 3.34% +Maturity risk premium
Maturity risk premium = 7.75%- 7.09%
= 0.66%
The most approximate answer is 0.75%.
