Question

A friend tells you that the one-year spot rate for risk-free Treasury securities is 5.3%. Do you believe him? Why or why not? What is the maximum sensible one-year spot rate?

a) Yes, as it aligns with historical rates.

b) No, without comparing to the current inflation rate.

c) Yes, as it is consistent with economic projections.

d) No, unless compared to the expected market return.

Answer 1

The maximum sensible one-year spot rate is not provided in the given information. To determine if the friend's claim of a one-year spot rate of 5.3% is believable, we need to compare it to historical rates, current inflation rate, and economic projections. The correct option b)

Step-by-step explanation:

The maximum sensible one-year spot rate is not provided in the given information.

To determine if the friend's claim of a one-year spot rate of 5.3% is believable, we need to compare it to historical rates, current inflation rate, and economic projections. Without this additional information, it is not possible to say for certain whether the friend's claim is true or false.

The correct answer to the question is option b) No, without comparing to the current inflation rate.