# Term_Structure,_with_Answers - T e r m S t r u c t u r e F...

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Unformatted text preview: T e r m S t r u c t u r e F i n a n c i a l E c o n o m i c s B r u c e C . D i e f f e n b a c h Q u e s t i o n 1 A n s w e r t h e f o l l o w i n g , a s s u m i n g t h a t t h e e x p e c t a t i o n s t h e o r y o f t h e t e r m s t r u c t u r e h o l d s . a ) I n i t i a l l y , s u p p o s e t h a t t h e c u r r e n t a n d e x p e c t e d f u t u r e s h o r t- t e r m i n t e r- e s t r a t e i s n i n e p e r c e n t . L e t S t d e n o t e t h e s h o r t- t e r m i n t e r e s t r a t e a t t i m e t ; S t i s t h e i n t e r e s t r a t e o n a o n e- y e a r b o n d a t t i m e t m a t u r i n g a t t i m e t + 1 . T h e c u r r e n t t i m e i s t = 1 . T h u s w e a r e g i v e n S 1 = . 9 , E ( S 2 ) = . 9 , E ( S 3 ) = . 9 , E ( S 4 ) = . 9 . F i n d t h e t e r m s t r u c t u r e : fi n d t h e y i e l d t o m a- t u r i t y o n b o n d s w i t h t w o , t h r e e , a n d f o u r y e a r s t o m a t u r i t y . W h a t i s t h e s h a p e o f t h e y i e l d c u r v e ? b ) A f t e r a b r i e f p e r i o d , s u p p o s e t h a t t h e c u r r e n t s h o r t- t e r m r a t e f a l l s t o fi v e p e r c e n t ( S 1 = . 5 ) . P e o p l e e x p e c t t h a t t h e s h o r t- t e r m r a t e w i l l r e t u r n g r a d u a l l y t o t h e n o r m a l v a l u e o f n i n e p e r c e n t . S p e c i fi c a l l y , t h e y...
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## This note was uploaded on 04/20/2008 for the course ECO 466y taught by Professor Dieffenbach during the Spring '08 term at SUNY Albany.

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Term_Structure,_with_Answers - T e r m S t r u c t u r e F...

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