FINANCE - EXPECTED INTEREST RATE - Unbiased Expectations Theory

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 expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now?

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THE UNBIASED EXPECTATIONS THEORY

TO FIND THE INTEREST RATE FOR PERIOD 1:

Step 1
Add one to the 2-year security's interest rate. Which results in 1.0624

Step 2
Square this figure.
1.0624*1.0624 = 1.12896376

Step 3
Divide this figure by ...

Solution Summary

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 expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now?

A recent edition of The Wall Street Journal reported interestrates of 2.25 percent, 2.60 percent, 2.98 percent, and 3.25 percent for three-year, four-year, five-year, and six-year Treasury note yields, respectively, According to the unbiased expectation theory of the term structure of interestrates, what are the expected one-y

I am considering a 1 yr bond that has a current interestrate of 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectationstheory of the term structure is correct, showing the computation what is the 1-year interestrateexpected during Year 3?

Assume that the current interestrate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectationstheory of the term structure is correct, what is the 1-year interestrateexpected during Year 3?

Exchange Rate Relationships. Define each of the following theories in a sentence or simple equation.
a. Interestrate parity theory.
b. Expectationstheory of forward rates.
c. Law of one price.
d. International Fisher effect
Heading Exchange Rate Risk. An importer in

What is the nominal interestrate (i) in Canada if the real estate of return is 2.5% and the expectedrate was 4.5%.
(The Fisher Effect formula should be used in this problem).

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 interestrate on a 1-year bond during the second year (Under the expectationstheory, the yield on a 2-year bond is

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 interestrate on 3-year, risk-free securities today?

Suppose the annual yield on a 2-year Treasury bond is 4.5%, while that on a 1-year bond is 3%. k* (=real risk-free rate of interest) is 1 percent, and the maturity risk premium is zero.
a. Using the expectationstheory, forecast the interestrate on a 1-year bond during the second year. (Hint: Under the expectationstheory, t

The spot exchange rate between the U.S. dollar and the German mark is $.5500/DM. The dollar deposit rate is 8 percent and the DM deposit rate is 4 percent.
a. What is covered interest parity? What is the six-month forward rate if covered interest parity holds?
b. What is the unbiased forward rate hypothesis? If the unbias