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Click here to aocess MindTap × MindTap-Cengage Learning x Rating Ag such As star > Clü Secure https://ng.cengage static/nb/ui/evofindex.html?deploymentid-5516516796343939398623 MINDTAP From Cengae Assignment 06-Interest Rates A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. O True O False The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 7.0400% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? 8.0325% 12.0015% 10.7730% 9.4500% Recall that on a one-year Treasury security the yield is 4.6900% and 7.0400% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.4500%, what is the market's estimate of the one-year Treasury rate one year from now? 8.5200% 10.8200% 9.7130% 7.2420% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20% Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? 6.61% 5.46% O 6.4s% 6.69%

Explanation / Answer

Ans: 1) True, as for 2 year the investment grows to Initial amount *(1+r)2 , while when invested separately the investment grows by factor (1+r) and again by (1+r) = (1+r)2

2) Let r be the rate need to calculate , As per pure expectation theory:

We can say (1+4.69%)*(1+r) = (1+7.04%)2 on calculation we get r = 9.45%, option d is correct

3) Risk premium for 2 year security is given as 0.45% in the above case. But 1 year security do not have. So actual rates for 2 year securities = 7.04-0.45 = 6.59%

Now again as per pure expectation thoery, we can say (1+r) = (1+6.59%)2/(1+4.69%) , r = 8.52%, option a is correct.

4) Yield on 2 year security = 5.83%, yield on five year security = 6.2%

Let's r be the yield on treasury rate of 3 year after 2 years from now.

We can say that as per pure expectation theory, (1+r)3 *(1+5.83%)2 = (1+6.20%)5

On solving we get r = 6.45%, option c is the correct ans.

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