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

The unbiased expectations theory suggests that 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. Therefore, the current rate on two-year Treasury securities should be the average of 5.50% and 5.75%, which is 5.625%.

One-Year Treasury Bills Currently Earn 5