Unbiased Expectations Theory One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 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 rate on two-year Treasury securities should be the average of expected short-term rates over the next two years. Thus, the expected rate on one-year Treasury bills one year from now is 5.75%, and the expected rate on one-year Treasury bills two years from now is unknown. Therefore, the average rate is (5.50% + 5.75%) / 2 = 5.625%.

Unbiased Expectations Theory One-Year Treasury Bills Currently Earn 5