Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% on
ID: 2739693 • Letter: R
Question
Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% 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 0.3000%. What is the market's estimate of the one-year Treasury rate one year from now? 10.6900% 9.0870% 12.1870% 13.5760% 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? 6.45% 6.61% 5.46% 6.69%Explanation / Answer
Q 1.
Yield on 2 year security excluding maturity risk premium = 8.42 - 0.30 = 8.12%
1f1 = ((1.0812)^2 / (1.0561) ) - 1
= 1.106897 - 1 = 0.106897 or 10.69%
Therefore, the correct answer is option A.
Q 2.
( (1.062)^5/ (1.0583)^2 ) = (1+x%)^3
= 1.20616^1/3 = 1.06447
x= 1.06447-1 = 6.45%
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