Question

One-year T-bills currently earn 0.38 percent. You expect that one year from now, one-year T-bill rates will increase to 0.44 percent.
If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

Answer 1

Answer:

Explanation:

One year T-bill earns 0.38

One year T-bill rates increase  0.44

Ubiased expectation theory:

R2 = [(1+R1)(1+E(R1))]^1/N - 1

So, R2 = [(1 + 0.0038)(1 + 0.0044)]^1/2 – 1 = 0.41%