One-year Treasury bills currently earn 3.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent and that two years from now, one-year Treasury bill rates will increase to 4.05 percent. If the unbiased expectations theory is correct, what should the current rate be on three-year Treasury securities?

Question

Quizplus · Accepted Answer

The correct answer is B because the unbiased expectations theory states that the current rate on a three-year Treasury security should be equal to the average of the expected one-year Treasury bill rates over the next three years. In this case, the expected one-year Treasury bill rates over the next three years are 3.15 percent, 3.65 percent, and 4.05 percent, so the average is (3.15% + 3.65% + 4.05%) / 3 = 3.62%.

One-Year Treasury Bills Currently Earn 3