Professional Custom Accounting Papers: what are the current interest rates on two-year and three-year securities
Two investment alternatives are presented to you, and you can only choose one: 1) invest in a one-year municipal bond with a 5 percent yield or, 2) a one-year corporate bond with an 8 percent yield. Your applicable federal income tax rate is 28 percent and no other differences exist between these two securities, which one would you invest in?
Interest rates for one-year securities are expected to be 4 percent today, 7 percent one year from now and 8 percent two years from now. Considering the pure expectations theory covered in the textbook, what are the current interest rates on two-year and three-year securities?