The yield to maturity on one-year zero-coupon bonds is 7.4%. The yield to maturity on...
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The yield to maturity on one-year zero-coupon bonds is 7.4%. The yield to maturity on two-year zero-coupon bonds is 8.4%.
a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Forward rate of interest %
b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Short-term interest rate %
c. If you believe in the liquidity preference theory, is your best guess as to next years short-term interest rate higher or lower than in (b)?
| - | Lower |
| -Higher |
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