Question

Suppose we observe the 3-year Treasury security rate (1R3) to be 6 percent, the expected 1-year...

Suppose we observe the 3-year Treasury security rate (1R3) to be 6 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected 1-year rate the following year—E(3r1)—to be 5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Unbiased expectations states that

(1+1R1)((1+2R1)*(1+3R1)=(1+1R3)^3

=>1R1=1.06^3/(1.04*1.05)-1

=>1R1=9.0674%

Add a comment
Know the answer?
Add Answer to:
Suppose we observe the 3-year Treasury security rate (1R3) to be 6 percent, the expected 1-year...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT