[Related to Solved Problem 5.2bl Use the data on Treasury securities in the foll

Question

[Related to Solved Problem 5.2bl Use the data on Treasury securities in the following table to answer the question: Date 03/05/2010 1 year 0.4% 0.88% 1.56% Source: U.S. Department of the Treasury Assuming that the liquidity premium theory is correct, on March 5, 2010, what did investors expect the interest rate to be on the one-year Treasury bill two years from that date if the term premium on a two-year Treasury note was 0.01% and the term premium on a three-year Treasury note was 0.03%? The expected interest rate is % Round your response to two decimal places)

Explanation / Answer

Solution:

From the given data we need to find the expected interest rate:

Given data

Calculations for finding interest rate

.

The expected interest rate r :

(1 + 0.87%)^2 * (1 + r) = (1 + 1.53%)^3

1.0174 * (1 + r) = 1.0466

(1 + r) = 1.0466 / 1.0174

(1 + r) = 1.0287

r = 0.0287

Date Year1 Year 2 Year3 03/05/2010 0.40% 0.88% 1.56%

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.