Problem 6-16 Expectations hypothesis and interest rates [L04] Using the expectat

Question

Problem 6-16 Expectations hypothesis and interest rates [L04] Using the expectations hypothesis theory for theterm structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.) -year T-bill at beginning of year 16 % -year T-bill at beginning of year 2 7 % -year T-bill at beginning of year 39 % -year T-bil at beginning of year 4 11 % Input variables: 1-year rate Year 1 1-year rate Year 2 1-year rate Year 3 1-year rate Year 4 6 percent 7 percent 9 percent 11 percent Solution and Explanation: 2-year security 3-year security -year security percent percent percent

Explanation / Answer

As per expectation theory, expected return for 2 year security is average of 1 year T- bill at begining of 1 year and 1 year t-bill at begining of 2 year.

Expected return for 2 year securities = (6 + 7)/2 = 6.5%

Expected return for 3 year securities = (6+7+9)/3 = 7.33%

Expected return for 4 year securities = (6 + 7 + 9 + 11)/4 = 8.25%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---