Question

The current one-year T-bill rate is .40 percent and the expected one-year rate 12 months from now is .80 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security

Answer 1

Answer:

0.60%

Explanation:

The computation of the current rate for a two year treasury security is shown below:

= (1 + current one year t-bill rate) × (1 + expected one year rate)^1 ÷ 2 -1

= (1 + 0.40%) × (1 + 0.80%)^1 ÷ 2 -1

= (1.004 × 1.008)^1 ÷ 2 -1

= 1.012032 ^1 ÷ 2 -1

= 1.0059980119  - 1

= 0.60%

We simply considered the information that is given in the question