Question

The current one-year T-bill rate is .40 percent and the expected one-year rate 12 months from now is 1.28 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

According to unbiased expectation theory,

Rate of 2 years treasury security = ((1+Current rate for 1 year rate)*(1+Forward rate of one year after one year))-1

((1+0.40%)*(1+1.28%))-1

=(1.0040*1.0128)-1

=0.0168512 or 1.69%

So, current rate for 2 year Treasury security would be 1.69%