Interest rates on 1-year,2-year,and 3-year Treasury bills are 5%,6%,and 7%,respectively.Assume that the pure expectations theory holds and that the market is in equilibrium.Which of the following statements is most correct?

Question

Quizplus · Accepted Answer

According to the pure expectations theory, the interest rates on longer-term securities are determined by the market's expectations of future short-term rates. Since the 2-year and 3-year rates are higher than the 1-year rate, it implies that the market expects interest rates to rise over the next two years.

Interest Rates on 1-Year,2-Year,and 3-Year Treasury Bills Are 5%,6%,and 7%,respectively