An Investor Sees the Current Twelve-Month Rate at 4% and Expects

question 34

Short Answer

An investor sees the current twelve-month rate at 4% and expects the following future twelve-month rate for each of the subsequent years; 4.5%, 5.5% and 6.0%. If this investor views a four-year maturity at 5.65% as equal to four consecutive one-year securities, what is his/her risk premium?

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Definitions:

Differing Spheres

The concept of having separate areas or aspects of life, work, or society that have different roles, norms, or expectations.

Overt Power

The visible, explicit, and acknowledged capacity to influence others or the outcome of events.

Coercive Power

The ability to influence others' behavior through threats, punishment, or sanctions.

Employees' Participation

The involvement of employees in making decisions that affect their work and the organization.