Question

One-year Treasury securities yield 4.25%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.7%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

2 Year Treasury Yiels = [ (1+Y1)(1+Y2) ] ^(1/2) - 1

Y1 = One Year Treasury Security Yield

Y2 = 1 Year Treasury sec yield 1 year from now.

2 Year Treasury Yiels = [ (1+Y1)(1+Y2) ] ^(1/2) - 1

= [ ( 1+ 0.0425)(1+0.057) ] ^(1/2) - 1

= [ (1.0425)(1.057) ] ^ ( 1/2) - 1

= [ 1.1019 ] ^ (1/2) - 1

= 1.0497 - 1

= 0.0497 i.e 4.97%

2 Years treasury security yield is 4.97%