Unbiased Expectations Theory Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill...
Unbiased Expectations Theory Suppose that the
current one-year rate (one-year spot rate) and expected one-year
T-bill rates over the following three years (i.e., years 2, 3, and
4, respectively) are as follows:
| 1R1=6.95%, E(2r1) =7.45%, E(3r1) =8.45% E(4r1)=8.95% |
Using the unbiased expectations theory, what is the current
(long-term) rate for four-year-maturity Treasury securities?
Homework Answers
Assume Current (long term) rate for four -year-maturity Treasury Security =R
As per unbiased Expectation Theory,
(1+R)^4=(1+1R1)*(1+E(2r1)*(1+E(3r1)*(1+E(4r1)
1R1=6.95%=0.0695
E(2r1)=7.45%=0.0745
E(3r1)=8.45%=0.0845
E(4r1)=8.95%=0.0895
(1+R)^4=1.0695*1.0745*1.0845*1.0895
(1+R)^4=1.35783
1+R=1.35783^(1/4)=1.07947
R=0.07947
Current (long term) rate for four -year-maturity Treasury Security =0.07947=7.947%
Current (long term) rate for four -year-maturity Treasury Security =7.95%(rounded to two decimals)
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Unbiased Expectations Theory Suppose that the
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Round your answers to 2 decimal
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