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Assume that the following data on U.S. Treasury securities is current:                              &nbsp

Assume that the following data on U.S. Treasury securities is current:                                                    
            Years to maturity        Yield to maturity                                 
                        1                      0.800%                                    
                        2                      0.910%                                    
                        3                      1.300%                                    
                        4                      1.350%                                    
                        5                      2.400%                                    
                        7                      2.560%                                    
                        10                    3.080%                                    
                        20                    4.200%                        
What is the implied interest rate on a one-year Treasury issued at the end of one year?

Choices:

0.80%

6.71%

1.02%

2.08%          

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Answer #1

Implied interest rate on a one-year Treasury issued at the end of one year = (1 + interest rate of 2 years bond)2 / (1 + interest rate of 1 year bond) - 1

Implied interest rate on a one-year Treasury issued at the end of one year = (1 + 0.910%)2 / (1+0.800) - 1

Implied interest rate on a one-year Treasury issued at the end of one year = 1.02%

Therefore 3rd option is correct

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