Question

The yield on a one-year Treasury security is 5.8400%, and the two-year Treasury security has a 8.7600% 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.)

Answer 1

Answer:

Market estimate of the one year treasury rate one year from now is 11.76%

Explanation:

The formula for pure expectations theory used in forecasting future interest rate is given below:

One year interest rate=(1+r2)^n+1/(1+r1)^n-1

r2 is the forecast interest rate in two years which is 8.7600%

r1 is the forecast interest rate in year 1 which i 5.8400%

n is one year from now

one year interest rate=(1+8.7600%)^2/(1+5.8400%)^1-1

one year interest rate=(1+0.087600)^2/(1+0.058400)^1-1

                                     =1.087600^2/(1.058400)^1-1

                                     =1.18287376 /1.058400-1

                                     =1.117605593-1

                                       =0.117605593

                                        =11.76%