Interest rates

Expectations Theory

One-year Treasury securities yield 4.7%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6.9%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places.

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Expected Interest Rate

The real risk-free rate is 2.75%. Inflation is expected to be 2% this year and 4.75% during the next 2 years. Assume that the maturity risk premium is zero.

1. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

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2. What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

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Maturity Risk Premium

The real risk-free rate is 2.5%, and inflation is expected to be 3.5% for the next 2 years. A 2-year Treasury security yields 7.75%. What is the maturity risk premium for the 2-year security? Round your answer to two decimal places.

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Inflation Cross-Product

An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 5% and inflation is expected to be 11% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look") Round your answer to two decimal places.

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