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29 July, 17:10

One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities

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  1. 29 July, 18:02
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    3.95 %

    Explanation:

    This can be calculated mathematically as follows;

    The current rate on two year T Security = ((1 + R1) * (1 + R2)) ^0.5 - 1

    In the question, R1 = 3.75 and R2 = 4.15

    We plug both in the equation above;

    ((1+3.75%) * (1+4.15%)) ^0.5 - 1

    (1.0375 * 1.0415) ^0.5 - 1 = 1.0395 - 1 = 0.0395 or simply 3.95%
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