The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity
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Question
The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%.
What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If you believe in the liquidity preference theory, is your best guess as to next year’s short-term interest rate higher or lower than in (b)?
The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%.
Explanation / Answer
The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%.
What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Forward rate of interest = (1+9%)^2/(1+8%) - 1
Forward rate of interest = 10.01%
If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Short-term interest rate = (1+9%)^2/(1+8%) - 1
Short-term interest rate = 10.01%
If you believe in the liquidity preference theory, is your best guess as to next year’s short-term interest rate higher or lower than in (b)?
The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%.
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