question archive Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve: ?10-year bond rate =1

Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve: ?10-year bond rate =1

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Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve:

?10-year bond rate =1.08%; 20-year bond rate = 1.64%  

a)Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

 Expected 10-year bond rate 10 years from now = _________________

(Be sure to show your work here).

Rate are expected to ___________ because ________________________

 

b)  For the same above if there is a liquidity premium of 0.08% for a 10-year bond and 0.20% for a 20-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why.

Expected Rate with LP __________ Rates Expected to __________________

(Be sure to show your work here).

c) Explain how interest rates are determined under the market segmentation theory What is the flaw in this theory?

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