Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4, respectively) are as follows: ₁R₁ = 5%, E(₂r₁) = 7%, E(₃r₁) = 7.5% E(₄r₁) = 7.85%
Using the unbiased expectations theory, calculate the current (long-term) rates for one-year and two-year -maturity Treasury securities.

Question

Quizplus · Accepted Answer

The one-year rate is given as 5%. The two-year rate is the average of the current one-year rate and the expected one-year rate for the next year: (5% + 7%)/2 = 6%.

Suppose That the Current One-Year Rate (One-Year Spot Rate) and Expected