4 - Based on economists’ forecasts and analysis, 1-year Treasury bill rates and

Question

4 -

Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

6 - On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero coupon Treasury security rates were as follows:

Using the unbiased expectations theory, calculate the 1-year forward rates on zero coupon Treasury bonds for years 2, 3, and 4 as of March 11, 20XX. (Do not round intermediate calculations and round your answers to 2 decimal places.)

4 -

Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

Explanation / Answer

6. Year 2 Forward Rate:

2F1 = [(1+1R2)^2/(1+1R1)] – 1

2F1 = Year 2 Forward Rate, 1R2 = 1.50%, 1R1 = 0.90%

2F1 = (1+0.0150)^2)/(1+0.009) – 1

2F1 = (1.0150)^2/(1.009) – 1.

2F1 = 1.030225/1.009 -1

2F1 = 1.02103568 – 1 = 0.021

Year 2 = 2.10%

3F1 = [(1+1R3)^3/(1+1R2)^2] – 1

3F1 = (1+0.0190)^3/(1+0.0150)^2

3F1 = (1.0190)^3/(1.0150)^2 – 1

3F1 = 1.05808986 /1.030225 -1

3F1 = 1.027047 – 1 = .0270

Year 3 = 2.70%

4F1 = [(1+1R4)^4/(1+1R3)^3] – 1

4F1 = (1.0205)^4/(1.0190)^3 –1

4F1 = 1.084556/1.05808986 -1

4F1 = 1.0250 – 1 = 0.0250

Year 4 = 2.50%

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