Question

Excel Online Structured Activity: Expectations Theory Interest rates on 4-year Treasury securities are currently 5.45%, while 6-year Treasury securities yield 7.75%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places. %

Answer 1

(1+5.45%)^4 * (1+r)^2 = (1+7.75%)^6

where,

r = Yield of 2 year securities 4 years from now

1.2365 * (1+r)^2 = 1.5649
   (1+r)^2 = 1.2657
   (1+r) = 1.12502
   r = 0.125

So, r = 12.5%