Question

One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities

Answer 1

3.95 %

Step-by-step explanation:

This can be calculated mathematically as follows;

The current rate on two year T Security = ((1 + R1) * (1 + R2))^0.5 -1

In the question, R1 = 3.75 and R2 = 4.15

We plug both in the equation above;

((1+3.75%) * (1+4.15%))^0.5 - 1

(1.0375 * 1.0415)^0.5 - 1 = 1.0395 - 1 = 0.0395 or simply 3.95%