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23 November, 00:47

The yield on a one-year Treasury security is 5.8400%, and the two-year Treasury security has a 8.7600% 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.)

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  1. 23 November, 01:07
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    Market estimate of the one year treasury rate one year from now is 11.76%

    Explanation:

    The formula for pure expectations theory used in forecasting future interest rate is given below:

    One year interest rate = (1+r2) ^n+1 / (1+r1) ^n-1

    r2 is the forecast interest rate in two years which is 8.7600%

    r1 is the forecast interest rate in year 1 which i 5.8400%

    n is one year from now

    one year interest rate = (1+8.7600%) ^2 / (1+5.8400%) ^1-1

    one year interest rate = (1+0.087600) ^2 / (1+0.058400) ^1-1

    =1.087600^2 / (1.058400) ^1-1

    =1.18287376 / 1.058400-1

    =1.117605593-1

    =0.117605593

    =11.76%
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