The pure expectations theory assumes that a one-year bond purchased today will h

Question

The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now O False The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 7.3800% 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? ? 9.9000% 0 11.286096 O 12.573090 ? 8.4150% Recall that on a one-year Treasury security the yield is 4.9200% and 7.3800% 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 0.2500%, what is the market's estimate of the one-year Treasury rate one year from now? O 11.9250% 9.3900% 0 10.705090 7.9820% 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? 7.10% ? 5.46% ? 6.45% ? 6.53%

Explanation / Answer

1. correct option is (a)

2.

Yield on 1 year treasury security = 4.92%

Yield on 2 year treasury security = 7.38%

Market's estimate of 1 year treasury rate one year from now = {(1 + 0.0738 )2/ 1 + 0.0492 } - 1

= (1.1530 / 1.0492 ) - 1

= 1.0989 - 1

= 0.0989

= 9.9 %

Hence, correct option is (a)

3.

Yield on 1 year treasury security = 4.92%

Yield on 2 year treasury security = 7.38%

Risk premium on 2 year treasury security = 0.25%

Net return expected 0n 2 year security = 7.38 - 0.25

= 7.13%

Market's estimate of 1 year treasury rate one year from now = {(1 + 0.07132/ 1 + 0.0492 } - 1

= (1.1476/1.0492) - 1

= 1.0939 - 1

= 0.0939

= 9.39%

Hence, correct option is (b)

4.

Yield on 2year treasury security = 5.83%

Yield on 5 year treasury security = 6.20%

Market's estimate of 3 year treasury rate 2 years from now = { ( 1 + 0.062 ) 2 / 1 + 0.0583} - 1

= ( 1.1278/ 1.0.583 ) - 1

= 1.0653 - 1

= 0.0653

= 6.53%   

Hence, correct option is (d)

  

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