Question

There are 3 term securities available with the following series of 1-year interest rates:Security A:5%, 4%, 3%, 3%, 4%Security B:4%, 2%, 3%, 5%, 6%Security C:5%, 3%, 3%, 4%, 5%Assume the expectations theory (without uncertainty) of the term structure is correct:(a)Calculate the term structure interest rates for maturities of 1 to 5 years, for all 3 securities.(b)Draw the yield curves for the 3 term securities of length 1 to 5 years.(c)Which security, if you must choose 1, will you buy if you plan to have it mature in 3 years

Answer 1

Hello attached below is a detailed solution to your question

A) attached below

B) attached below

C) Security A

Step-by-step explanation:

A) calculate the term structure interest rates for maturities of 1 to 5 years for all 3 securities

we will use expectation hypothesis ;

B) Draw the yield curves for the 3 term securities of length 1 to 5 years

- (1+ yield(t))= ( 1 + rate(1) )* ......

C) The security to choose if you plan to have it mature in 3 years is SECURITY A this is because it has maximum yield