Chapter 3: Q16BP (page 188)

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in Table 6-6.
1-year T bill at the beginning of year 1
6%
1-year T bill at the beginning of year 2
7%
1-year T bill at the beginning of year 3
9%
1-year T bill at the beginning of year 4
11%

Short Answer

Expert verified

The interest rate will be 6.5% in the second year, 7.33% in the third year, and 8.25% in the fourth year.

Step by step solution

Calculation for T-bill having a maturity of 2 years

The interest rate will be 6.5%.

$\begin{array}{rcl} 2 - y e a r m a t u r i t y & = & \frac{(I n t e r e s t o f 1 - y e a r + I n t e r e s t o f 2 - y e a r)}{M a t u r i t y p e r i o d} \\ = & \frac{(6 % + 7 %)}{2} \\ = & 6.5 % \end{array}$

Calculation for T-bill having a maturity of 3 years

The interest rate will be 7.33%.

$\begin{array}{rcl} 3 - y e a r m a t u r i t y & = & \frac{(Interest of 1 - year + Interest of 2 - year + Interest of 3 - year)}{Maturity period} \\ = & \frac{(6 % + 7 % + 9 %)}{3} \\ = & 7.33 % \end{array}$

Calculation for T-bill having maturity of 4 years

The interest rate will be 8.25%.

$\begin{array}{rcl} 4 - y e a r m a t u r i t y & = & \frac{(Interest of 1 - year + Interest of 2 - year + Interest of 3 - year + Interest of 4 - year)}{Maturity period} \\ = & \frac{(6 % + 7 % + 9 % + 11 %)}{4} \\ = & 8.25 % \end{array}$

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

January	\(100,000
February	\)93,000
March	\(25,000
April	\)25,000
May	\(20,000
June	\)35,000
July	\(45,000
August	\)45,000
September	\(55,000
October	\)85,000
November	\(105,000
December	\)123,000
Total annual sales	\(756,000

Short Answer

Step by step solution

Calculation for T-bill having a maturity of 2 years

Calculation for T-bill having a maturity of 3 years

Calculation for T-bill having maturity of 4 years

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Financial Performance

Operational Management

Human Resources

Intermediate Accounting

Change Management

Corporate Finance

Study anywhere. Anytime. Across all devices.

1-year T bill at the beginning of year 1	6%
1-year T bill at the beginning of year 2	7%
1-year T bill at the beginning of year 3	9%
1-year T bill at the beginning of year 4	11%