Question

Interest rates on 4-year Treasury securities are currently 6.9%, while 6-year Treasury securities yield 7.15%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer:

7.65%

Explanation:

It use asked to find the 2 year forward rate 4 years from now. In this regards, the formula should be:

(1 + %6year)^6 = (1 + %4year)^4 * (1 + %Fwd2year)^2

We have values for 6 and 4 year and we only need the Fwd2 year rate

(1 + 0.0715)^6 / ( 1 + 0.069) ^4 = ( 1 + Fwd2year) ^ 2

Fwd2year = 7.65%