1.The Wall Street Journal reported interest rates of 6 percent, 6.35 percent, 6.65 percent, and 6.75 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory, what are the expected one-year rates for years 4, 5, and 6?
2.The Wall Street Journal reports that the rate on three-year Treasury securities is 5.60 percent and the rate on four-year Treasury securities is 5.65 percent. According to the unbiased expectations hypothesis, what does the market expect the one-year Treasury rate to be in year 4, E(4r1)?
3.3.How does the liquidity premium theory of the term structure of interest rates differ from the unbiased expectations theory? In a normal economic environment, that is, an upward- sloping yield curve, what is the relationship of liquidity premiums for successive years into the future? Why?
4.Based on economists forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
1R1 = 5.65%
E(2r1) = 6.75% L2 = 0.05%
E(3r1) = 6.85% L3 = 0.10%
E(4r1) = 7.15% L4 = 0.12%
Using the liquidity premium hypothesis, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself.
5.The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent. The one-year interest rate expected in year four is E(4r1), 6.10 percent. According to the liquidity premium hypothesis, what is the liquidity premium on the four-year Treasury security, L4?
6.You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning two years from today, 2f1?
7.How do monetary policy actions made by the Federal Reserve impact interest rates?
8.What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the repricing model focus? Explain.
9.What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important when using the repricing model?
10.What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?