Question

Suppose 1-year Treasury bonds yield 3.00% while 2-year T-bonds yield 3.20%. Assuming the pure expectations theory is correct, and thus the maturity risk premium for T-bonds is zero, what is the yield on a 1-year T-bond expected to be one year from now?

Answer 1

Answer:

the yield on a 1-year T-bond expected to be one year from now is 1 +  x = 1.0340038835  or x = 3.40%

Explanation:

The computation of the yield on 1 year T bond expected one year from now is shown below:

Let us assume the 1 year T bond yield be x

So, the equation that could be made is given below:

(1.03) × (1 + x) = (1.032)^2

(1.03) × (1 + x) = 1.065024

1 + x =  1.065024  ÷ 1.03

1 +  x = 1.0340038835

x = 3.40%

Hence, 1 +  x = 1.0340038835

or x = 3.40%