One-year Treasury securities yield 5%. The market anticipates that 1 year from n
ID: 2757668 • Letter: O
Question
One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. The real risk-free rate is 3%. Inflation is expected to be 3% this after. The maturity risk premium is estimated to be 0.05 x (t - 1)%, where = number of years to maturity. What is the yield on a 7-year Treasury note? INFLATION Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the theory holds and the real risk-free rate (r+) is 2%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 2%, what inflation rate is expected after Year 1? DEFAULT RISK PREMIUM A company's 5-year bonds are yielding 7.75% per year. Treasury bonds with the sai ne maturity are yielding 5.2% per year, and the real risk-free rate (r4) is 2.3%. The average in lation premium is 2.5%; and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?Explanation / Answer
6-7
Let, Yield for 2 year treasury securities = X%
One year treasury security rate = 5%
1 year from now, one year treasury security rate = 6% (anticipated)
Thus,
(1+x%)^2 = (1+6%)*(1+5%)
(1+x%)^2 =1.113
1+X% = (1.113)^(1/2) = 1.05499
X% = 5.499%
Thus, Yield for 2 year treasury securities will be 5.49%
Pl. repost other unanswered questions for their proper answers!
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.