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26 February, 22:32

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 2.20 percent and on 10-year Treasury bonds is 4.05 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. Round your answer to 2 decimal places.)

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  1. 26 February, 22:47
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    E (5r5) = 0.06

    Explanation:

    The expected rate (which is the the projected return on a monetary investment) on the treasury bonds at 4.05% can be calculated as seen below:

    Rate on 5-year Treasury Bonds, E (r5) = 2.20%

    Rate on 10-year Treasury Bonds, E (r10) = 4.05%

    (1 + E (r5)) ^5 * (1 + E (5r5)) ^5 = (1 + E (r10)) ^10

    1.0220^5 * (1 + E (5r5)) ^5 = 1.0405^10

    1.11495 * (1 + E (5r5)) ^5 = 1.48738

    (1 + E (5r5)) ^5 = 1.33403

    1 + E (5r5) = 1.05933

    E (5r5) = 0.05933

    E (5r5) = 0.06
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