Question

The yield on a one-year Treasury security is 4.0000%, and the two-year Treasury security has a 5.4000% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

6.8188%

5.796%

7.7734%

8.6599%

Recall that on a one-year Treasury security the yield is 4.0000% and 5.4000% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

6.4138%

7.3117%

8.1455%

5.4517%

Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)

6.45%

6.69%

6.53%

7.10%

Answer 1

1

Annualized Forward rate of 1 years 1 years from now =((1+2 Year rate)^2/(1+1 Year rate)^1)-1

Annualized Forward rate of 1 years 1 years from now=((1+0.054)^2/(1+0.04)^1)-1

Annualized Forward rate of 1 years 1 years from now % = 6.8188

2

Annualized Forward rate of 1 years 1 years from now =((1+2 Year rate)^2/(1+1 Year rate)^1)-1

Annualized Forward rate of 1 years 1 years from now=((1+0.052)^2/(1+0.04)^1)-1

Annualized Forward rate of 1 years 1 years from now % = 6.4138

3

Annualized Forward rate of 3 years 2 years from now =((1+5 Year rate)^5/(1+2 Year rate)^2)^1/3-1

Annualized Forward rate of 3 years 2 years from now=((1+0.062)^5/(1+0.0583)^2)^1/3-1

Annualized Forward rate of 3 years 2 years from now % = 6.45