Ask Question
29 April, 20:45

Unbiased Expectations Theory The Wall Street Journal reports that the rate on four-year Treasury securities is 1.60 percent and the rate on five-year Treasury securities is 2.15 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury rate to be four years from today, E (5r1) ? (LG6-7)

+3
Answers (1)
  1. 29 April, 23:26
    0
    Explanation: Unbiased Expectations Theory states that current long-term interest rates contain an implicit prediction of future short-term interest rates. More specifically, the theory states that an investor should earn the same amount of interest from an investment in a single two-year bond today as that person would with two consecutive investments in one-year bonds.

    From the above question:

    1 + 1R5 = { (1 + 1R4) 4 (1 + E (5r1)) }1/51.0215

    = { (1.016) 4 (1 + E (5r1)) }1/5 (1.0215) 5

    = (1.016) 4 (1 + E (5r1)) (1.0215) 5 / (1.016) 4

    = 1 + E (5r1) 1 + E (5r1)

    = 1.0438E (5r1) = 4.38%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Unbiased Expectations Theory The Wall Street Journal reports that the rate on four-year Treasury securities is 1.60 percent and the rate on ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers