Question

Interest rates on 4-year Treasury securities are currently 5.4%, while 6-year Treasury securities yield 7.65%. 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

12.3%

Step-by-step explanation:

In this question, we are asked to calculate what is believed a 2-year market security will be yielding, 4 years from now

To calculate this, we proceed mathematically;

2 year yield 4 years from now = [ ( 1 + 0.0765)^6 / ( 1 + 0.054)^4]^1/2 - 1

2 year yield 4 years from now = [ 1.5563 / 1.2341]^1/2 - 1 = 0.123

2 year yield 4 years from now = 0.123

2 year yield 4 years from now = 12.3%