Question

nterest rates on 2-year Treasury securities are currently 6.0%, while 6-year Treasury securities yield 6.5%. If the pure expectations theory is correct, what does the market believe that 4-year securities will be yielding 2 years from now

Answer 1

The market believes that 4-years from now, the 4-year securities will be 6.75%

Step-by-step explanation:

We proceed as follows using the pure expectations theory .

The theory states that the future rates are exclusively represented by the forward rate.

Mathematically;

(1 + .065)^6 = (1 + .^206)2 * (1 + x)^4

1.4591 = 1.1236 * (1 + x)^4

Divide both sides by 1.1236

1.2986 = (1 + x)^4

Take both sides to the 1/4 power to get rid of the power of 4

1.0675= 1 + x

x = .0675 or 6.75%