Question

The current one-year T-bill rate is .33 percent and the expected one-year rate 12 months from now is 1.30 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

Answer:

According to the unbiased expectations theory, the current rate for a two-year treasury security should be 0.98%.

Explanation:

Unbiased Expectations Theory help us predict future short-term interest rate by using current long-term interest rates.

T-bill rate = 0.33%

Expected one-year rate 12 months from now = 1.30%

1R2= [(1 + 0.0033)(1 + 0.013)]$^{\frac{1}{2}}$− 1

= 1.0098 - 1 = 0.98%