Question

Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 5.10%. Assuming the pure expectations theory is correct, and thus the maturity risk premium for T-bonds is zero, what is the yield on a 1-year T-bond expected to be one year from now

Answer 1

Answer:

6.212%

Explanation:

Data given in the question

One year treasury bond yield = 4%

Two year treasury bond yield = 5.10%

Maturity risk premium for treasury bond is zero

So, the expected one year treasury bond expected one year from now is

Let us assume the expected one year treasury bond be X

(1 + One year treasury bond yield) × (1 + X) = (1 + Two year treasury bond yield)^number of years

(1.04) × (1 + X) = (1.051)^2

So, (1+X) = 1.06212

So, X = 6.212%