Question

The yield on a one-year treasury security is 5.1500%, and the two-year treasury security has a 7.7250% 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.)

A. 8.8086%
B. 11.8139%
C. 10.3631%
D. 13.1611%

Answer 1

The market's estimate of the one-year treasury rate one year from now, according to the pure expectations theory, is 10.3%. The answer choice is C.

Step-by-step explanation:

In order to find the market's estimate of the one-year treasury rate one year from now, we can use the pure expectations theory. According to this theory, the market's expectation of the future interest rate can be estimated using the current yield on long-term bonds and short-term bonds.

The formula to estimate the one-year treasury rate one year from now is:

one-year treasury rate one year from now = (two-year treasury rate - one-year treasury rate) + two-year treasury rate

Substituting the given values, we get:

one-year treasury rate one year from now = (7.7250% - 5.1500%) + 7.7250% = 2.5750% + 7.7250% = 10.3%

The answer choice is C.