Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.40%.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? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.

Question

Quizplus · Accepted Answer

The correct answer is A.The pure expectations theory states that the yield on a long-term bond is equal to the average of the expected future short-term rates. In this case, the 2-year T-bond yield is 4.40%, which means that the market expects the 1-year T-bond yield to be 4.40% one year from now.

Suppose 1-Year Treasury Bonds Yield 4