Question

The following are the expected one-year T-bill rates for the next

four years: 3%, 4%, 5% and 6%. According to the basic model of the expectations hypothesis, what would you expect the rate for three-year securities to be?

Answer 1

4%

Step-by-step explanation:

The computation of rate for three-year securities is shown below:-

Expected Rate for three year securities = (First year + Second year + Third year) + Rate for three year

= (3% + 4% + 5%) ÷ 3

= 12% ÷ 3

= 4%

Therefore for computing the rate for three-year securities we simply applied the above formula.

Since we have to find out the three year securities rate so we considered only three year T bill rates