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1a)You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.3%. Your brother-in-law, a broker at Safe and Sound Securities, has given
1a)You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.3%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium = 3.00% Liquidity premium = 0.2% Maturity risk premium = 1.40% Default risk premium = 2.00% On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places. % b)One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.7%. 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 intermediate calculations. Round your answer to two decimal places. % c)Interest rates on 4-year Treasury securities are currently 5.55%, while 6-year Treasury securities yield 8%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. %
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