Exam 2 Additional Thoughts

Exam 2 Additional Thoughts - Some Additional Exam 2...

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Some Additional Exam 2 Thoughts In addition to – but not in place of – the Ch. 2 review!
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Chapter 6 Review Session You have the following schedule for treasury security interest rates: Maturity Yield 1 year 1.5% 2 years 1.7% 3 years 2.0% 4 years 2.2% 5 years 2.5% 6 years 2.8% 7 years 3.0% Assume that the pure expectations hypothesis holds.
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Chapter 6 Review Session What does the market expect will be the interest rate on 2 year securities 4 years from now? = --- 2+4 = 6, 6 year rate from previous slide = 2.8 What is 2 year rate = 2X Need 4 four year rates X = 4 2 4*2.2 2.8 6 X + =
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Chapter 6 Review Session The real risk free rate of interest is 2%. Inflation is expected to be 3% the next 2 years and 5% during the next 3 years after that. Assume that the maturity risk premium is 0. What is the yield on 3 year Treasury securities? 5.2% 5.7% 6% 6.2% 6.5%
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Chapter 6 Review Session B is correct.
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Exam 2 Additional Thoughts - Some Additional Exam 2...

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