The yield on a one-year Treasury security is 4.2300%, and the two-year Treasury security has a 6.3450% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)
7.2275%
10.7987%
9.6933%
8.5029%

Recall that on a one-year Treasury security the yield is 4.2300% and 6.3450% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)
9.2285%
6.8809%
8.0952%
10.2809%

Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)
6.53%
5.46%
6.45%
7.10%

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Parrain Parrain · Answer 1 · 2022-02-18T13:53:38+01:00

Based on the yields given on the Treasury securities, the market estimate of the Treasury rates would be:

This can be found as:

= ( ( 1 + two year rate) ^ Number of years / ( 1 + one year rate) ) - 1

= ( ( 1 + 6.3450%) ² / ( 1 + 4.23%) ) - 1

= 8.5029%

This can be found as:

= ( ( 1 + two year rate - maturity premium) ^ Number of years / ( 1 + one year rate) ) - 1

= ( ( 1 + 6.3450% - 0.2%) ² / ( 1 + 4.23%) ) - 1

= 8.0952%

= ( ( 1 + five year rate) ^ Number of years / ( 1 + two year rate)^number of years) ^ ( 1 / period of Treasury yield) - 1

= ( ( 1 + 6.20% ) ⁵ / ( 1 + 5.83%)² ) ¹/³ - 1

= 6.45%

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