a.If the expectations theory is correct (that is, maturity risk premium = 0) then an upward sloping yield curve means that the market believes that interest rates will rise in the future.
b.A 5-year corporate bond may have a yield less than a 10 year treasury bond.
c.The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
d.Statements b and c are correct.
e.All the statements above are correct.

Solution Preview

The expectations theory would say that an upward sloping yield curve implies that future interest ...

Assume that a one-year Treasury securities yield 5%.The market anticipates that 1 year from now, one-year Treasury securities will yield 6%. So if the pure expectationstheory is correct, what is the yield today for 2-year Treasury securities?

The interest rate on 1-year Treasury securities is 5 percent. The interest rate on 2-year Treasury securities is 6 percent. The expectationstheory is assumed to be correct. Which of the following statements is most correct?
a.The maturity risk premium is positive.
b.The market expects that 1-year rates will be 5.5 percen

Suppose the annual yield on a 2-year Treasury bond is 7.5 percent, the yield on a 1-year bond is 5 percent, k* is 3 percent, and the maturity risk premium is zero.
A) Using the expectationstheory, forecast the interest rate on a 1-year bond during the second year (Under the expectationstheory, the yield on a 2-year bond is

1. Which of the following theories of expectations holds that individuals usa all information available in forming expectations?
Rational expectationstheory
Certainty equivalent theory
Expected value analysis
Adaptive expectationstheory
2. The only school of economics that could be construed as advocating big governme

SQ5-4,19 6-3
Explain why the supply curve in the classical theorey of interest rates has a positive slope. Why does the demand curve in the classical theory have a negative slope?
What assumptions underlie the rational expectations view of interest?
What exactly is a basis point? Why is it an important interest rate mea

16. An investor with a six year investment horizon believes that interest rates are determined only by expectations about future interest rates. This investor should expect to earn the same rate of return over the 6 year time horizon if the investor buy a 6 year or a 3 year bond now and another 3 year bond three years from now.

3. [5] Suppose we look in the newspaper and find the following rates: the rate on 1-year securities is 4.65%, on a similar 2-year security 6.24%, and a 3-year security 6.67%. If the unbiased expectationstheory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now?

1. The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after (Year 3). According to the expectationstheory, what should be the interest rate on 3-year, risk-free securities today?