Exercise 6 Answers

Exercise 6 Answers - what will the interest rate be on a...

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ECON 423, Fall 2011 Class Exercise 6 Yield curve 1. Government economists have forecasted one year T-bill rates for the next five years to be 3%, 3.5%, 4%, 4.5%, and 5%. a. Using the expectations theory, what will be the interest rates on a two-year bond and a five-year bond? b. If the term premiums for one – to five- year bonds are 0%, 0.2%, 0.4%, 0.6% and 0.75%,
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Unformatted text preview: what will the interest rate be on a two-year bond? Five year bond? a. Interest rate on two-year bond = (3%+3.5%)/2 = 3.25% Interest rate on four-year bond = (3%+3.5%+4%+4.5%)/4=3.75% b. Interest rate on two-year bond = 3.25% + 0.2% = 3.45% Interest rate on four-year bond = 3.75%+0.6% = 4.35%...
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