Question

Interest rates on 4-year Treasury securities are currently 5.6%, while 6-year Treasury securities yield 7.45%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now

Answer 1

2 year yield 4 years from now = [ ( 1 + 0.056)⁶ / ( 1 + 0.0745)⁴]^1/2 - 1

2 year yield 4 years from now = [ 1.3867 / 1.3329]^1/2 - 1

2 year yield 4 years from now = 1.019 - 1

2 year yield 4 years from now = 1.99%

Step-by-step explanation: