Unbiased Expectations Theory One-year Treasury bills currently earn 4.60 percent. You expect that one year from...
Unbiased Expectations Theory One-year Treasury bills currently earn 4.60 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?
Homework Answers
| Computation of current rate of 2 years treasury bill based on unbiased theory: | |||
| Current rate | = | [(1 + 0.046)(1 + 0.0475)] ^ (1/2) - 1 | |
| = | [1.0957] ^ (1/2) - 1 | ||
| = | 1.04675 - 1 | ||
| = | 0.04675 | ||
| or | = | 4.68% | |
| Therefore, Current rate = 4.68% | |||
| If it is helpful, please rate the answer and if any doubt arises let me know | |||
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