This solution was written by a subject matter expert. It’s designed to help students like you learn core concepts.

Step-by-step

Explanation:

Future Value (FV) from Reinvesting:

Year 1:

Future Interest Rate: 6.3%

FV from Reinvesting: 1× (1 0.063) =1.0630

Year 2:

Future Interest Rate: 5.3%

FV from Reinvesting: 1.0630× (1 0.053) =1.1207

Year 3:

Future Interest Rate: 2.3%

FV from Reinvesting: 1.1207× (1 0.023) =1.1452

Year 4:

Future Interest Rate: 3.3%

FV from Reinvesting: 1.1452× (1 0.033) =1.1835

Year 5:

Future Interest Rate: 4.3%

FV from Reinvesting: 1.1835× (1 0.043) =1.2343

Year 6:

Future Interest Rate: 5.3%

FV from Reinvesting: 1.2343× (1 0.053) =1.3005

Year 7:

Future Interest Rate: 6.3%

FV from Reinvesting: 1.3005× (1 0.063) =1.3829

Year 8:

Future Interest Rate: 6.3%

FV from Reinvesting: 1.3829× (1 0.063) =1.4743

Year 9:

Future Interest Rate: 6.3%

FV from Reinvesting: 1.4743× (1 0.063) =1.5756

Year 10:

Future Interest Rate: 6.3%

FV from Reinvesting: 1.5756× (1 0.063) =1.6885

Effective Annual Rate (EAR):

Year 1:

EAR Percentage: (1 0.063)×100=1.06%

Year 2:

EAR Percentage: (1 0.053)×100=1.12%

Year 3:

EAR Percentage: (1 0.023)×100=1.15%

Year 4:

EAR Percentage: (1 0.033)×100=1.18%

Year 5:

EAR Percentage: (1 0.043)×100=1.23%

Year 6:

EAR Percentage: (1 0.053)×100=1.30%

Year 7:

EAR Percentage: (1 0.063)×100=1.38%

Year 8:

EAR Percentage: (1 0.063)×100=1.47%

Year 9:

EAR Percentage: (1 0.063)×100=1.58%

Year 10:

EAR Percentage: (1 0.063)×100=1.69%

These values represent the Future Value from reinvesting and Effective Annual Rate for each respective year.

Explanation:

The comparison between the one-year interest rate and the ten-year interest rate is based on the interest rate expectations provided in the scenario.

In the scenario:

One-Year Interest Rate (Year 1):

Initially, the one-year interest rate is 6.3%.

Ten-Year Interest Rate (Year 10):

In the long term (Year 10), the interest rate is expected to stabilize at 6.3%.

Comparison:

In the first year, the one-year interest rate is 6.3%.

In the tenth year, the ten-year interest rate is also 6.3%.

Based on this information, there is no difference between the one-year and ten-year interest rates; they are both expected to be 6.3%. This implies that, according to the scenario provided, the interest rate is expected to remain constant over the ten-year period and not vary with the time to maturity.

In the given scenario, part B, the term structure of interest rates is constructed, indicating the expected rates for each year from 1 to 10. Part C highlights that the one-year and ten-year interest rates are both projected to stabilize at 6.3%, indicating no significant difference between short-term and long-term rates according to the provided expectations.