1.A recent edition of The Wall Street Journal reported interest rates of 10.75 percent, 11.10 percent, 11.48 percent, and 11.75 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what are the expected 1-year forward rates for years 4, 5, and 6? (Do not round intermediate calculations and round your answers to 2 decimal places.)

2. The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 2.50 percent and on 10-year Treasury bonds is 4.65 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(5r5). (Do not round intermediate calculations and round your answer to 2 decimal places.)

3. Nikki G’s Corporation’s 10-year bonds are currently yielding a return of 6.75 percent. The expected inflation premium is 1.15 percent annually and the real interest rate is expected to be 2.50 percent annually over the next ten years. The liquidity risk premium on Nikki G’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on 4-year securities and increases by 0.06 percent for each additional year to maturity. Calculate the default risk premium on Nikki G’s 10-year bonds. (Round your answer to 2 decimal places.)

4.A 2-year Treasury security currently earns 1.71 percent. Over the next two years, the real interest rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.45 percent per year. Calculate the maturity risk premium on the 2-year Treasury security. (Round your answer to 2 decimal places.)

5. The Wall Street Journal reports that the rate on 2-year Treasury securities is 2.10 percent and the rate on 4-year Treasury securities is 3.05 percent. According to the unbiased expectations hypothesis, what does the market expect the 2-year Treasury rate to be two years from today, E(2r2)? (Do not round intermediate calculations and round your answer to 2 decimal places.)

6. One-year Treasury bills currently earn 1.50 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.70 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.)

7. The Wall Street Journal reports that the rate on 5-year Treasury securities is 1.80 percent and the rate on 6-year Treasury securities is 2.35 percent. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be five years from today, E(6r1)? (Do not round intermediate calculations and round your answer to 2 decimal places.)

I am not going to solve all the problems, since it is all the same thing with different numbers.I will solve number 5:

{(1.0305)^4) / (1+0.0210)^2)}^0.50) -1

Answer: 4% Market expected rate.

Number 1:

1 + 1R4 = {(1 + 1R3)(1 + 4f1)}1/4
1.111 = {(1.1075)3(1 + 4f1)}1/4
(1.111)4 = (1.1075)3(1 + 4f1))
(1.111)4 / (1.1075)3 = 1 + 4f1
1 + 4f1 = 1.12157
4f1 = 12.16%

1 + 1R5 = {(1 + 1R4)4(1 + 5f1)}1/5
1.1148 = {(1.111)4(1 + 5f1)}1/5
(1.1148)5 = (1.111)4(1 + 5f1)
(1.1148)5 / (1.111)4 = 1+5f1
1 + 5f1 = 1.13013
5f1 = 13.01%

1 + 1R6 = {(1 + 1R5)5(1 + 6f1)}1/6
1.1175 = {(1.1148)5(1 + 6f1)}1/6
(1.1175)6 = (1.1148)5(1 + 6f1)
(1.1175)6 / (1.1148)5 = 1 + 6f1
1 + 6f1 = 1.13110
6f1 = 13.11%

To answer these questions, we need to use various theories and formulas related to interest rates. Let's go through each question one by one and explain how to solve them.

1. According to the unbiased expectation theory of the term structure of interest rates, the forward rates can be calculated as the average of the expected future spot rates for the corresponding periods. In this case, we have the spot rates for 3, 4, 5, and 6 years as 10.75%, 11.10%, 11.48%, and 11.75%, respectively.

To calculate the expected 1-year forward rates for years 4, 5, and 6, we need to find the expected spot rates for those periods. As per the unbiased expectation theory, we can use the following formula:

Expected Spot Rate = (1 + Spot Rate at Year t)^(Year t) / (1 + Spot Rate at Year t-1)^(Year t-1) - 1

Using this formula, we find:

Expected Spot Rate for Year 4 = (1 + 11.1%)^4 / (1 + 10.75%)^3 - 1
Expected Spot Rate for Year 5 = (1 + 11.48%)^5 / (1 + 11.1%)^4 - 1
Expected Spot Rate for Year 6 = (1 + 11.75%)^6 / (1 + 11.48%)^5 - 1

Calculating these values will give you the expected 1-year forward rates for years 4, 5, and 6.

2. To calculate the expected rate on a 5-year Treasury bond purchased five years from today (E(5r5)), we need to consider the current rate on 5-year Treasury bonds (2.50%) and the expected inflation rate for the next five years.

Assuming the maturity risk premium is zero, the expected rate can be calculated using the formula:

Expected Rate = (1 + Current Rate) * (1 + Avg. Inflation Rate)^(Number of Years) - 1

Using this formula, we find:

Expected Rate = (1 + 2.50%) * (1 + Avg. Inflation Rate)^(5) - 1

Calculating this value will give you the expected rate on a 5-year Treasury bond purchased five years from today.

3. To calculate the default risk premium on Nikki G’s 10-year bonds, we need to consider various components like the expected inflation premium, real interest rate, liquidity risk premium, and maturity risk premium.

The default risk premium can be calculated as the difference between the yield on Nikki G’s 10-year bonds and the risk-free rate. The risk-free rate is the sum of the expected inflation premium, real interest rate, liquidity risk premium, and the maturity risk premium.

So, to calculate the default risk premium, we take:

Default Risk Premium = Yield on Nikki G’s 10-year bonds - (Expected Inflation Premium + Real Interest Rate + Liquidity Risk Premium + Maturity Risk Premium)

Substituting the given values, we can calculate the default risk premium.

4. To calculate the maturity risk premium on the 2-year Treasury security, we need to consider the real interest rate, inflation premium, and the yield on the 2-year Treasury security.

The maturity risk premium can be calculated as the difference between the yield on the 2-year Treasury security and the sum of the real interest rate and the inflation premium.

So, the maturity risk premium = Yield on the 2-year Treasury security - (Real Interest Rate + Inflation Premium)

Substituting the given values, we can calculate the maturity risk premium.

5. According to the unbiased expectations hypothesis, the market expects the future spot rate to be equal to the current forward rate. In this case, we are given the rates on 2-year and 4-year Treasury securities.

To find the expected 2-year Treasury rate two years from today (E(2r2)), we need to consider the current forward rate for 2 years and the current rate for 4 years.

So, the expected 2-year Treasury rate two years from today = Current Forward Rate for 2 years.

6. According to the unbiased expectations theory, if expectations of future interest rates change, the yield curve will shift accordingly. In this case, we are given the current rate on 1-year Treasury bills and the expected rate on 1-year Treasury bills one year from now.

To find the current rate on 2-year Treasury securities, we can assume that the expected rate on 1-year Treasury bills in the current market should equal the expected rate on 1-year Treasury bills one year from now.

So, the current rate on 2-year Treasury securities = Expected rate on 1-year Treasury bills one year from now.

7. Similar to question 5, according to the unbiased expectations hypothesis, the market expects the future spot rate to be equal to the current forward rate.

To find the market's expectation for the 1-year Treasury rate five years from today (E(6r1)), we need to consider the current forward rate for 6 years.

So, the market's expectation for the 1-year Treasury rate five years from today = Current Forward Rate for 6 years.

By applying these formulas and calculations, you can find the answers to each of the given questions.