On May 23, 20XX, the Existing or Current (Spot) One-Year

question 98

Multiple Choice

On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

₁R₁ = 4.55 percent,
₁R₂ = 4.75 percent,
₁R₃ = 5.25 percent,
₁R₄ = 5.95 percent
Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.

• A) year 1: 4.95 percent, Year 2: 6.26 percent, Year 3: 8.08 percent
• B) year 1: 3.75 percent, Year 2: 6.02 percent, Year 3: 9.00 percent
• C) year 1: 4.95 percent, Year 2: 7.26 percent, Year 3: 8.08 percent
• D) year 1: 3.65 percent, Year 2: 6.32 percent, Year 3: 11.08 percent

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Net Operating Income

A measure of a company's profitability from regular business operations, excluding deductions of interest and taxes.

Payback Period

The time required for an investment to generate cash flows sufficient to recover the initial investment cost.

Scrap Value

The estimated resale value of an asset at the end of its useful life, also known as salvage value.

Incremental Annual

Incremental annual refers to the year-over-year changes or additional amounts in revenue, cost, or other financial metrics.