Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.According to the expectations theory,what is the three-month nominal yield?

Question

Quizplus · Accepted Answer

The expectations theory suggests that longer maturity yields are a function of the current interest rates and expected future interest rate.Using equation 5.14,page 152,we can find the three-month nominal yield as follows: [(1 + 0.01 F1F1F1S1F1F1F10 1/12)F1F1F1S1F1F1F10 (1 + 0.025 F1F1F1S1F1F1F10 1/12)F1F1F1S1F1F1F10 (1 + 0.06 F1F1F1S1F1F1F10 1/12)- 1] F1F1F1S1F1F1F10 4 = 0.0485.

Suppose the Expected One-Month Rates of Return Are 3% P 3.89% 3.89 \% 3.89%

Suppose the Expected One-Month Rates of Return Are 3% P $3.89 \%$