Question

Interest rates on 4-year Treasury securities are currently 5.55%, while 6-year Treasury securities yield 7.7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet 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 your intermediate calculations. Round your answer to two decimal places.

Answer 1

12.13%

Step-by-step explanation:

Calculation to determine what the market believe that 2-year securities will be yielding 4 years from now using a geometric average

Yield=((1+6 year rate)^6/(1+4 year rate)^4)^(1/2)-1

Yield =((1+7.7%)^6/(1+5.55%)^4)^(1/2)-1

Yield =0.1213*100

Yield =12.13%

Therefore what the market believe that 2-year securities will be yielding 4 years from now

using a geometric average will be 12.13%