Question

Interest rates on 4-year Treasury securities are currently 6.05%, while 6-year Treasury securities yield 7.6%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

2 year yield 4 years from now 37.99%

Step-by-step explanation:

given data

Interest rates r1 = 6.05% = 0.0605

Interest rates r2 = 7.6% = 0.0760

to find out

2 year yielding 4 years from now

solution

we find here 2 year securities will be yielding 4 years from now by as

2 year yield 4 years from now =
`((1+r2)^(t2))/([(1+r1)^(t1)]^(0.5))` - 1

put here value we get

2 year yield 4 years from now =
`((1+0.0760)^6)/([(1+0.0605)^4]^(0.5))` - 1

2 year yield 4 years from now = 1.379915 - 1

2 year yield 4 years from now = .379915

so 2 year yield 4 years from now 37.99%