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borteleto borteleto
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5 years ago
The current rate of return on a one-year U.S. Government security is 3%. The rate of return on a two-year U.S. Government security is 5%. According to the expectations theory, what is the return on a one-year U.S. Government security purchased one year from today?
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Foundations of Finance

Foundations of Finance


Edition: 9th
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5 years ago
 
$1,000  1.03 = $1,030 at the end of year one
$1,000  (1.05)2 = $1,102.50 at the end of two years
$1,102.50 - $1,030 = $72.50 interest needed in year 2
$72.50/$1,030 = 7.04%
 
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5 years ago
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