Pure expectations theory of the term structure

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Reference no: EM131909639

1. According to the pure expectations theory of the term structure, what are the market’s expectations of the short rate for the next three semi-annual periods (meaning the 6-month periods beginning in 6 months, 12 months, and 18 months), i.e. what are the implied forward rates? Do not round excessively.

Maturity (years) vs. Spot Rate

0.5 5.000%

1.0 4.750%

1.5 4.600%

2.0 4.400%

2. If last year’s sales mounted to $10 million and the EBIT was in the amount of $200,000; how much would next year’s EBIT be at a new level of sales of $11 million if it has a degree of operating leverage (DOL) of 5?

Reference no: EM131909639

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