The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 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) ?

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Business

Kaleb Chapman

13 March, 00:48

The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 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) ?

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Aileen Baird · Answer 1

The market expect the one-year Treasury rate to be four years from today, E (5r1) to be 8.379%

Explanation:

1 + 1R5 = [ (1 + 1R4) ^4 (1 + E (5r1)) ]1/5

1.0615 = [ (1.056) ^4 (1 + E (5r1)) ]1/5

(1.0615) 5 = (1.0456) ^4 (1 + E (5r1))

1 + E (5r1) = (1.0615) 5 / (1.0456) ^4

E (5r1) = 8.379%

Therefore, The market expect the one-year Treasury rate to be four years from today, E (5r1) to be 8.379%