The Wall Street Journal (WSJ) reports 1-year Treasury securities are yielding r

Question

The Wall Street Journal (WSJ) reports 1-year Treasury securities are yielding rT1 = 3.23% and you anticipate that one year from now, 1-year Treasury securities will be yielding 1rT1 = 3.78%. Assume that the pure expectations theory is valid. Determine the yield today for 2-year Treasury securities (find rT2).  Show your work.

WSJ also reports that interest rates on 4-year Treasuries are currently rT4 = 4.82% and 6-year Treasuries are rT6 = 4.15%. Again assume that the pure expectations theory is valid. Determine what 2-year Treasuries will be yielding 4 years from now (find 4rT2). Show your work.

Explanation / Answer

Part 1.

(1 + 0.0323) * (1 + 0.0378) = (1 + rT2)^2

1.07132 = (1 + rT2)^2

rT2 = (1.07132)^(1/2) - 1

rT2 = 3.50%

Part 2.

(1 + 0.0482)^4 * (1 + 4rT2)^2 = (1 + 0.0415)^6

(1 + 4rT2)^2 = (1 + 0.0415)^6 / (1 + 0.0482)^4

4rT2 = 2.82%

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