One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

Question

Quizplus · Accepted Answer

According to the unbiased expectations theory, the current interest rate on a two-year Treasury security should be the average of the current one-year rate and the expected one-year rate one year from now. Thus, the calculation is as follows: $(3.75\% + 4.15\%)/2 = 3.95\%$.

One-Year Treasury Bills Currently Earn 3