In the expectations theory of the term structure with no risk, if the current an
ID: 2817591 • Letter: I
Question
In the expectations theory of the term structure with no risk, if the current and expected 1-period interest rates for the next three periods are 3%, 4% 5% and 4% respectively, the 4-period interest rate is 3% @ 4%. 0 596. 6%. Question 3 1 pts The term premium compensates for the riskiness of long-term bonds because their prices are more volatile than short-term bonds long-term bonds because their prices are less volatile than short-term bonds. short-term bonds because their prices are more volatile than long-term bonds O short-term bonds because their prices are less volatile than long-term bondsExplanation / Answer
2.
Correct option is > 4%
Period 4 interest rate = ((1+3%) x (1+4%) x (1+5%) x (1+4%))^(1/4) -1
Period 4 interest rate = 4%
3.
Correct option > First option > long-term bonds because their prices are more volatile than short term bonds
The long-term bond will have higher interest rate risk and volatility because for long term interest rates are not stable.