Using the expectations hypothesis theory for the term structure of interest rate

Question

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Round your answers to 2 decimal places. Omit the "%" sign in your response.) 1-year T-bill at beginning of year 1 5 % 1-year T-bill at beginning of year 2 6 % 1-year T-bill at beginning of year 3 9 % 1-year T-bill at beginning of year 4 11 % Expected return 2 year security % 3 year security % 4 year security %

Explanation / Answer

2 year security = (6+5)/2= 5.5% 3 year security = (6+5+9)/3= 6.667% 4 year security = (6+5+9+11)/4= 7.75%

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