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The current yield on a 1-year Treasury security is 2% and it is expected to be 2.7% the following year and 3.2% the year thereafter. Based on pure expectations theory, what is the yield on a 3-year treasury security today?

User Jass
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Final answer:

The yield on a 3-year Treasury security today, based on the pure expectations theory and given interest rates, is approximately 2.966%.

Step-by-step explanation:

Based on the pure expectations theory, which states that long-term interest rates are the average of current and expected short-term interest rates, we can calculate the yield on a 3-year Treasury security.

Knowing the current yield on a 1-year Treasury security is 2% and it is expected to be 2.7% the following year and 3.2% the year thereafter, we can use these expectations to determine the yield for the 3-year Treasury.

The formula to calculate this average yield over the three years would be:

3-Year Treasury Yield = (Current 1-Year Yield + Next Year's Expected 1-Year Yield + Following Year's Expected 1-Year Yield) / 3

Plugging the given yields into the formula yields:

3-Year Treasury Yield = (2% + 2.7% + 3.2%) / 3

3-Year Treasury Yield = 2.966%

Therefore, the yield on a 3-year Treasury security today is approximately 2.966%.

User Treefrog
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