Question

mers 0-0 v Help Save & Exit Subm Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1 = 3.26%, E(251) = 4.70%, B(371) = 5.20%, (471) = 6.70% Using the unbiased expectations theory, calculate the current long-term) rates for 124 3., and 4-year-maturity Treasury securities. Plot the resulting yield curve. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Years Current (Long- Term) Rates < Prey 4 of 16 8 Next > 20 LOSSES

Answer 1

• Eg where r2 = 20% and r1 = 1%
• The first step of the calculation is to add one to the two-year bond’s interest rate. The result is 1.2.
• The next step is to square the result or (1.2 * 1.2 = 1.44).
• Divide the result by the current one-year interest rate and add one or ((1.44 / 1.18) = 1.22). = 22%

Similarly we can calculate our result

1. Same as short term rates = 3.26%

2. 1.047

1.047*1.047

1.0962/1.0326 = 1.0616

6.16%

3 (1.052)^2/1.047 = 5.70%

4 (1.067)^2/1.052 = 8.22%