One-year Treasury bills currently earn 2.55 percent. You expect that one year fr

Question

One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.05 percent and that two years from now, 1-year Treasury bill rates will increase to 3.45 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current rate % One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.05 percent and that two years from now, 1-year Treasury bill rates will increase to 3.45 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current rate % One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.05 percent and that two years from now, 1-year Treasury bill rates will increase to 3.45 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current rate %

Explanation / Answer

Using expectation theory,

(1 + S3)^3 = (1 + S1) x (1 + 1F1) x (1 + 2F1)

Here, S3 - Current 3-year rate, S1 - Current 1-year rate = 2.55%, 1F1 - 1-year rate 1-year from now = 3.05%, 2F1 - 1-year rate 2-year from now = 3.45%

=> (1 + S3)^3 = (1 + 2.55%) x (1 + 3.05%) x (1 + 3.45%)

=> S3 = 3.016%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.