The yield on a one-year Treasury security is 4.4600%, and the two-year Treasury security has a 6.6900% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 8.9676% 10.2231% 11.3889% 7.6225%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
The yield on a one-year Treasury security is 4.4600%, and the two-year Treasury security has a 6.6900% yield. Assuming that the pure expectations
theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate
calculations.)
8.9676%
10.2231%
11.3889%
7.6225%
Recall that on a one-year Treasury security the yield is 4.4600% and 6.6900% on a two-year Treasury security. Suppose the one-year security does
not have a maturity risk premium, but the two-year security does and it is 0.3%. What is the market's estimate of the one-year Treasury rate one year
from now? (Note: Do not round your intermediate calculations.)
7.1023%
8.3556%
10.6116%
9.5254%
Transcribed Image Text:The yield on a one-year Treasury security is 4.4600%, and the two-year Treasury security has a 6.6900% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 8.9676% 10.2231% 11.3889% 7.6225% Recall that on a one-year Treasury security the yield is 4.4600% and 6.6900% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.3%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 7.1023% 8.3556% 10.6116% 9.5254%
Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure
expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not round your
intermediate calculations.)
6.45%
7.10%
6.69%
6.53%
Transcribed Image Text:Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) 6.45% 7.10% 6.69% 6.53%
Expert Solution
Step 1

Pure Expectations Theory:

  • This theory states that forward rates are exclusively representative of the expected future rates.
  • Thus, the whole term structure is the reflection of the market's anticipations of future short-term interest rates.

 

NOTE:

  • “Since you have posted multiple questions, we will provide the solution only to the first question as per our Q&A guidelines. Please repost the remaining questions separately.”
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Treasury Market
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education