Respuesta :
Answer:
Option (b) is correct.
Option (b) is correct.
Explanation:
1. Pure Expectation Theory :
Each option must provide the same amount of cash at the end of 2 years, which implies that,
CF at the end of year 2 = CF at the end of year 1
[tex](1+0.0738)^{2} = (1+0.0492) (1+x) [tex\]
Hence, x = 9.90
so the market's estimate of the one year Treasury rate one year from now it will be 9.90%
2. In case of maturity risk premium, the cash flow of two year treasury security will reduce, it will be:
= 7.38 - 0.40
= 6.98.
Hence, Treasury Rate will be as follows:
CF at the end of year 2 = CF at the end of year 1
[tex](1+0.0698)^{2} = (1 + 0.0492) (1 + x)[tex\]
x = 9.080%
The market estimate for the one year treasury security will be 9.90%.
How to calculate the treasury security
From the pure expectation, each option must provide the same amount of cash at the end of the 2 years.
Therefore, the Cf at the end of the second year will be equal to that of the first year. This will be:
(1 + 0.0738)² = (1 + 0.0492)(1 + x)
x = 9.90
Also, when the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.4%, the market's estimate of the one-year treasury rate one year from now will be:
(1 + 0.0698)² = (1 + 0.0492)(1 + x)
x = 9.080%
In conclusion, the market's estimate of the one-year treasury rate one year from now is 9.080%.
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