3. Suppose that today the one-year Treasury note yields 0.13% (0.0013), the two-

Question

3.  Suppose that today the one-year Treasury note yields 0.13% (0.0013), the two-year note yields 0.38% (0.0038), the three-year note yields 0.70% (0.0070), the five-year note yields 1.42% (0.0142), the seven-year note yields 1.95% (0.0195) and the ten-year note yields 2.52% (0.0252).  Under the pure expectations theory with no maturity risk:

            a)  What is the expected yield on a one-year note delivered one year from now?

            b)  What is the expected yield on a one-year note delivered two years from now?

            c)  What is the expected yield on a two-year note delivered three years from now?

            d)  What is the expected yield on a two-year note delivered five years from now?

            e)  What is the expected yield on a five-year note delivered five years from now?

            f)  What is the expected yield on a three-year note delivered seven years from now?

Explanation / Answer

Year Yield 1 0.13% 2 0.38% 3 0.70% 5 1.42% 7 1.95% 10 2.52% Formula = (yield1 * year1 - yield2 * year2) / (year2 - year1) A 0.63% B 1.34% C 2.50% D 3.28% E 3.62% F 3.85%

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