Purchase Solution

According to the expectations theory and showing the computations, what should be the interest rate on 3-year, risk-free securities today?

Not what you're looking for?

Ask Custom Question

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 expectations theory and showing the computations, what should be the interest rate on 3-year, risk-free securities today?

Purchase this Solution
Solution Summary

You will find the answer to this puzzling question inside...

Purchase this Solution
Free BrainMass Quizzes
Operations Management

This quiz tests a student's knowledge about Operations Management

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Motivation

This tests some key elements of major motivation theories.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

View More Free Quizzes
Related BrainMass Solutions

  • Interest rates, risk-free rate, expectation, liquidity, 1 year treasury bond,

    Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year 3. According to the expectations theory, what should be the interest rate on 3-year, risk-free securities today? 3.

  • interest rate on 3-year, risk-free securities

    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 expectations theory, what should be the interest rate on 3-year, risk-free securities today?

  • Expectations theory

    342251 Expectations theory for interest rates Expectations theory: what should be the interest rate on 3-year, risk-free securities? The real risk-free rate of interest is 3 percent.

  • Multiple choice questions on bonds, yields

    The one-year spot rate is 10% and the two-year spot rate is 8%. If the one- year spot rate expected in one year is 6%, according to the liquidity preference theory, what must be the one -year liquidity premium commencing one year from now?

  • Interest rate determination

    What is the term structure of interest rates? What is a yield curve? e. Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 8% thereafter. The real risk-free rate is 3%.

  • Value of put options

    If you believed that the expectations theory of the term structure were correct, what would you say that the market expects the oneyear zero rate to be one year from now? 12.

  • Expectations theory

    28867 Interest rate is discussed. The interest rate on 1-year Treasury securities is 5 percent. The interest rate on 2-year Treasury securities is 6 percent. The expectations theory is assumed to be correct.

  • Yield curve / interest rates

    Assume that the expectations theory holds and the real risk- free rate is r* = 2%. If the yield on 3- year Treasury bonds equals the 1- year yield plus 2%, what inflation rate is expected after Year 1?

  • Expectations theory of the term structure

    with a 3 year bond These two amounts should be equal according to the expectation theory.

View More Related Solutions