Inflation is expected to be 3% in the year 2014, 4% in the year 2015, and 3.5% in the year 2016. Real interest is 3%, the liquidity premium for the borrower is 1%, and the default risk premium is 1% for 2014 and increases by 1% for every year. Calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory holds.
Use the information from the question above to calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory does not hold.
Inflation is expected to be 3% in the year 2014, 4% in the year 2015, and 3.5% in the year 2016. Real interest is 3%, the liquidity premium for the borrower is 1%, and the default risk premium is 1% for 2014 and increases by 1% for every year. Calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory holds.
Use the information from the question above to calculate the interest for a 1 year, 2 year, and 3 year loan assuming that the pure expectations theory does not hold.
Related questions
- Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is most correct?
| a. | The maturity risk premium is positive. |
| b. | Interest rates are expected to rise over the next two years. |
| c. | The market expects one-year rates to be 5.5% one year from today. |
| d. | Answers a, b, and c are all correct. |
| e. Only answers b and c are correct. And please explain why |
