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Unformatted text preview: Kelly Widmaier Week 3 Assignment FIN 500 Chapter 6: The Structure of Interest Rates #3, page 162 A commercial bank made a 3-year term loan at 10 percent. The bank’s economics department forecasts that 1 and 2 years in the future, the 1-year interest rate will be 10 percent and 14 percent, respectively. The current 1-year rate is 8 percent. Given that the bank’s forecasts are reliable, has the bank set the 3-year rate correctly? t R 1 = 8 percent t + 1 f 1 = 10 percent t + 2 f 1 = 14 percent (1 + t R 3 ) = [(1.08)(1.10)(1.14)] 1/3 t R 3 = 1.11 – 1 t R 3 = 0.11 or 11.0% The bank should make the 3-year term loan at 11 percent, given that the bank’s forecasts are reliable. #10, page 162 Historically, the yield curve typically has been upward sloping. Why would you expect this to be the case? (Hint: Historically, economic recessions typically last 9 to 12 months; expansions typically last 3 to 4 years.) Since recessions last a shorter amount of time than expansions, it is typical for the yield...
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