The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%, 10.5%, 13%, 14.5%, 16%, and 17.5%. Using the expectations theory, what will be the interest rates on a three-year bond, six-year bond, and nine-year bond?

Question

Shayna Stewart

Business

3 April, 05:16

The one-year interest rate over the next 10 years will be 3%, 4.5%, 6%, 7.5%, 9%, 10.5%, 13%, 14.5%, 16%, and 17.5%. Using the expectations theory, what will be the interest rates on a three-year bond, six-year bond, and nine-year bond?

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Howard Reese · Answer 1

interest rates on a three-year bond = (int in year1+int in year2+int in year3) / n = (3+4.5+6) / 3 = 4.8%

interest rates on a six-year bond = (3%+4.5%+6% + 7.5% + 9% + 10.5%) / 6 = 7.35%

interest rates on a nine-year bond = (3%+4.5% + 6% + 7.5% + 9% + 10.5% + 13% + 14.5%+16%) / 9 = 10.23%

So, int rate on a 3 year bond is 4.8%; on a 6 year bond is 7.35%; on a 9 year bond 10.23%