Question

Interest rates on 4-year Treasury securities are currently 5.8%, while 6-year Treasury securities yield 7.95%. 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.


a.None

b.80%

c.15%

d. 6.5%

e. 5.5%

Answer 1

Answer:

2 year yield 4 years from now = 11.0%

Explanation:

2 year yield 4 years from now = [ ( 1 + 0.0795)^6 / ( 1 + 0.058)4]1/2 - 1

2 year yield 4 years from now = [ 1.50073 / 1.286466]1/2 - 1

2 year yield 4 years from now = 1.011 - 1

2 year yield 4 years from now = 11.0%