Calculate interest rate on current treasury securities with

Reference no: EM13392176

Suppose the expectations theory of the term structure is correct. Suppose that the current interest rate on a one-year Treasury bill is 3 percent. Suppose the one-year T-bill rate is expected to rise to 4 percent one year from today, then to 5 percent the following year, and then stay at 5 percent thereafter. Compute the interest rate on current Treasury securities with maturities of one year, two years, three years, four years and five years, and plot the yield curve.

The term structure of interest rates for bonds with different maturities is given by:

Interest rate on a 1-yr.bond

Interest rate on a 2-yr.bond

Interest rate on a 3-yr.bond

Interest rate on a 4-yr.bond

Interest rate on a 5-yr.bond

Repeat the exercise in part (a), but assume instead that the one-year T-bill rate is 8 percent currently, and that the one year T-bill rate is expected to fall to 6 percent one year from today; fall to 4 percent the follow.

Reference no: EM13392176

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