Use the table for the question below Suppose the term structure of interest rate

Question

Use the table for the question below Suppose the term structure of interest rates is shown below: Term 10 20 Rate R% 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% 10) What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) Normal; Higher B) Normal; Lower C) nverted; Higher D) Inverted; Lower Use the follouoing information to answer the questionfs) below: Suppose the term structure of risk-free interest rates is given as: Term 1year 2 years 3 years 5years 10 years Rate 2.25% 2.80% 3.20% 4.10% 6.30% 11) The present value of an investment that pays $2000 in one year and $3000 in three years for certain is closest to: A) S4685 B) S5000 C) $4729 D) S4707

Explanation / Answer

10) As we can see the slope will be inverted as the rates are decreasing over time. This happens when market thinks that future rates will be lower

hence option D is correct


11)
PV = sum of discounted ash flows
=2000(1.0225)+3000/(1.032^3)=$4685
Hence option A is correct

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