Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 5.10%.Assuming the pure expectations theory is correct,and thus the maturity risk premium for T-bonds is zero,what is the yield on a 1-year T-bond expected to be one year from now?
A)5.90%
B)6.21%
C)6.52%
D)6.85%
E)7.19%

Question

Quizplus · Accepted Answer

According to the pure expectations theory, the expected yield on a 1-year T-bond one year from now should be equal to the yield on a 2-year T-bond today. Using the given yields, we can calculate the expected yield as follows:
Expected yield on 1-year T-bond = Yield on 2-year T-bond - Yield on 1-year T-bond
Expected yield on 1-year T-bond = 5.10% - 4.00%
Expected yield on 1-year T-bond = 1.10%
Therefore, the expected yield on a 1-year T-bond one year from now is 1.10% + 4.00% = 5.10%. Converted into the answer choices, the answer is B (6.21%).

Suppose 1-Year Treasury Bonds Yield 4