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Suppose that the Expectation Theory is completely correct. People's belief about the path of interest rates on one-year zero-coupon Treasury bonds over the following 4

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Suppose that the Expectation Theory is completely correct. People's belief about the path of interest rates on one-year zero-coupon Treasury bonds over the following 4 years is described by the following table. Scenario Probability 1-year interest rate in year 1 1-year interest rate in year 2 1-year interest rate in year 3 1-year interest rate in year 4 1/3 4 6 6 6 B 1/3 4 3 7 5 1/3 4 2 2 2 (2pt) What is today's interest rate on a 2-year zero-coupon Treasury bond? a. (2pt) What is today's interest rate on a 4-year zero-coupon Treasury bond? b. (2pt) What is the current price of a 4-year zero-coupon Treasury bond with a face value of $1,000? C. (2pt) Suppose that you did not buy the 4-year bond in part c. Instead, you take the same amount of money (i.e. your answer to part c.) to buy a one-year zero-coupon Treasury bond and roll it over for 4 years. What is the probability that you will be paid more than $1,000 at the end of the fourth year? Explain. Suppose that the Expectation Theory is completely correct. People's belief about the path of interest rates on one-year zero-coupon Treasury bonds over the following 4 years is described by the following table. Scenario Probability 1-year interest rate in year 1 1-year interest rate in year 2 1-year interest rate in year 3 1-year interest rate in year 4 1/3 4 6 6 6 B 1/3 4 3 7 5 1/3 4 2 2 2 (2pt) What is today's interest rate on a 2-year zero-coupon Treasury bond? a. (2pt) What is today's interest rate on a 4-year zero-coupon Treasury bond? b. (2pt) What is the current price of a 4-year zero-coupon Treasury bond with a face value of $1,000? C. (2pt) Suppose that you did not buy the 4-year bond in part c. Instead, you take the same amount of money (i.e. your answer to part c.) to buy a one-year zero-coupon Treasury bond and roll it over for 4 years. What is the probability that you will be paid more than $1,000 at the end of the fourth year? Explain

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