Unbiased Expectations Theory One-year Treasury bills currently earn 5.35 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.50 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?
5.5000%
5.4250%
10.8500%
5.3500%
Based on Unbiased expectations theory,
(1 + 2 Yr rate)2 = (1 + 1 Yr rate) * (1 + 1 Yr Rate 1 Yr from now)
(1 + 2 Yr rate)2 = (1 + 5.35%) * (1 + 5.50%)
(1 + 2 Yr rate)2 = 1.111443
(1 + 2 Yr rate) = 1.054250
2 Yr rate = 0.054250
2 Yr rate = 5.4250%
Unbiased Expectations Theory One-year Treasury bills currently earn 5.35 percent. You expect that one year from...
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