Recall that on a one-year Treasury security the yield is 5.1500% and 7.7250% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.3%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 11.1141% 9.7492% 8.2868% 12.3815% a Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) 6.53% 6.61% 6.45% 07.10% Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Component Symbol la la la Characteristic It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. It is calculated by adding the inflation premium to r*. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate for a short-term riskless security when inflation is expected to be zero. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's rating; the higher the rating, the lower the premium added, thus lowering the interest rate. lola |