PM EDT Video Excel Online Structured Activity: Expectations Theory Interest rate

Question

PM EDT Video Excel Online Structured Activity: Expectations Theory Interest rates on 4-year Treasury securities are currently 6.4%, while 6-year Treasury securities yield 7.35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. 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 your intermediate calculations. Round your answer to two decimal places. Check My Work Reset Problem Back

Explanation / Answer

Expectation Theory 4year treasury security yield= 6.40% 6year treasury security yied= 7.35% Algebraic solution: Formula Total return earned on 6yr securities= 1.530426 (pow(1.0735,6) Total return earned on 4 yr securities= 1.281641 (pow(1.064,4)) Yield on 2 year ,securities,4yrs from now= 9.28% 1.530426= 1.281641*(1+X% for 2 year) 1.194114 .=(1+X)power2 1.092755 .=(1+X) 0.092755 .=X Geometric solution: 1+ total return earned on 6year securities= 1.530426 (pow(1.0735,6) 1+total return eaned on 4 year securities= 1.281641 (pow(1.064,4)) Yield on 2 year ,securities,4yrs from now= 9.28% 1.530426/1.281641=(1+X)for 2 year

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