Question

The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury security has a 6.4560% 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:

7.5430%

Explanation:

Treasury securities are the governmental bills, notes, and bonds.

Yield is the amount you earn by holding on to these treasury securities.

Given yield on 1-year Treasury security = 5.38% = 0.0538

and

yield on 2 year Treasury security = 6.456% = 0.06456

THe formula to use would be:

$\frac{(1+r_{2})^n}{(1+r_{1})^n}-1$

Where

$r_2$ is the yield of 2 year security  (here, n = 2)

and

$r_1$ is the yield of 1 year security ( here, n = 1)

Now, substituting, we get:

$\frac{(1+r_{2})^n}{(1+r_{1})^n}-1\\=\frac{(1+0.06456)^2}{(1+0.0538)}-1\\=0.075430$

Converting this to percentage:

0.075430 * 100 = 7.5430%