The pure expectations theory, or the expectations hypothesis, asserts that long-

Question

The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now False rue The yield on a one-year Treasury security is 4.4600%, and the two-year Treasury security has a 6.0200% yield Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? O 7.6000% O 6.460090 8.6640% 9.6520% Recall that on a one-year Treasury security the yield is 4.4600% and 6.0200% on a two-year Treasury security Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.3500%. what is the market's estimate of the one-year Treasury rate one year from now? 0 8.7500% 5.8570% O 7.8550% 6.8900% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20% Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? 6.45% 6.61% 5.46% 7.10% ? ?

Explanation / Answer

False

b. one year rate in one year = 1.0602^2/1.0446 - 1 = 7.600%

c. one year rate = (1 + (6.02% - 0.35%))^2/1.0446 - 1 = 6.8900%

d. 3 year rate in 2 years = (1.062^5/1.0583^2)^1/3 - 1 = 6.45%

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