Question

One-year T-bills currently earn 0.38 percent. You expect that one year from now, one-year T-bill rates will increase to 0.44 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

	Current rate on two-year Treasury securities %

Answer 1

One year T-bill earns 0.38

One year T-bill rates increase expectation 0.44

As per ubiased expectation theory:

R2 = [(1+R1)(1+E(R1))]^^1/N - 1

R2 = [(1 + 0.0038)(1 + 0.0044)]^^1/2 – 1 = 0.41%