Suppose that: 1 ) The interest on a one-year bond today is 3%; 2 ) The interest on a one-year bond starting one year from now is expected to be 4% per year; 3 ) The interest on a one-year bond starting two years from now is expected to be 5% per
year; 4 ) The risk premium on a two-year bond is 0.5%; and 5 ) The risk premium on a three-year bond is 1.0%. Use that information to answer the following questions. a) According to the expectations theory, what is the interest rate today on a two-year bond? Show your work. b) According to the expectations theory, what is the interest rate today on a three-year bond? Show your work. c) Plot the yield curve.
a) (3% + 4%)/2 + 0.5% = 4.0%
b) (3% + 4% + 5%)/3 + 1.0% = 5.0%
c) plot 3 points with 1, 2, and 3 years to maturity vs. yields of 3%, 4%, and 5%.
You might also like to view...
The practice of the ECB and national central banks of preventing massive bank failures after the financial crisis of 2008 had what effect on the affected economies?
A) Prevention of bank failures greatly reduced the pain of the crisis for taxpayers. B) Prevention of bank failures ended up not saving most banks anyway. C) Banks resisted the takeover by the ECB and refused to make additional credit available. D) Governments financed the bailouts by issuing more domestic debt, which caused extreme fiscal problems.
Assuming that pizza is a normal good, if students' income at your college increases substantially, there would be:
A) a reduction in the demand for pizza. B) an increase in the quantity of pizza demanded. C) no change in the demand for pizza. D) an increase in the demand for pizza.