Question

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securitieswith maturities of two, three, four years on the following data. Input your answers as a percent rounded to 2 decimal places.1-year T-bill at begining of year 1 5%1-year T-bill at begining of year 2 8%1-year T- bill begining of year 3 7%1-year T-bill begining of year 4 10% Expected Return2 year security -----------------------%3 year security ----------------------%4 year security -----------------------%

Answer 1

6.50 ± 1% ; 6.67 ± 1% ; 7.50 ± 1%

Step-by-step explanation:

The computation is shown below:

Expected Return 2 year security

= (T-bill at beginning of year 1 + T-bill at beginning of year 2) ÷ number of years

= (5% + 8%) ÷ 2

= 6.50 ± 1%

Expected Return 3 year security

= (T-bill at beginning of year 1 + T-bill at beginning of year 2 + T-bill at beginning of year 3) ÷ number of years

= (5% + 8% + 7%) ÷ 3

= 6.67 ± 1%

Expected Return 4 year security

= (T-bill at beginning of year 1 + T-bill at beginning of year 2 + T-bill at beginning of year 3 + + T-bill at beginning of year 4) ÷ number of years

= (5% + 8% + 7% + 10%) ÷ 4

= 7.50 ± 1%