Question
Assume that the one-year spot rate is 2% (k1=2%) and the expected future spot rate is 3.01% (E(k1) = 3.01%). Investors dont like long-term investments,
Assume that the one-year spot rate is 2% (k1=2%) and the expected future spot rate is 3.01% (E(k1) = 3.01%). Investors dont like long-term investments, so the two-year bond yield includes a maturity risk premium of 1%. Answer the questions that follow.
Part 1 What two-year spot rate is consistent with these values under the maturity preference hypothesis?
Responses:
2.50%
3.01%
3.00%
3.50%
Part 2 Using the two-year spot rate from Part 1, calculate the forward rate. The resulting forward rate is _______ the expected future spot rate.
Responses:
larger than
the same as
smaller than
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