Suppose that today the one-year Treasury note yields 0.18% (0.0018), the two-yea

Question

Suppose that today the one-year Treasury note yields 0.18% (0.0018), the two-year note yields 0.26% (0.0026), the three-year note yields 0.34% (0.0034), the five-year note yields 0.67% (0.0067), the seven-year note yields 1.12% (0.0112) and the ten-year note yields 1.72% (0.0172). Under the pure expectations theory with no maturity risk:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

            a) What is the expected yield on a one-year note delivered one year from now?

            b) What is the expected yield on a one-year note delivered two years from now?

            c) What is the expected yield on a three-year note delivered two years from now?

            d) What is the expected yield on a two-year note delivered five years from now?

            e) What is the expected yield on a five-year note delivered five years from now?

            f) What is the expected yield on a three-year note delivered seven years from now?

Explanation / Answer

a) 0.26 - 0.18 = 0.08%

b) 0.34 - 0.26 = 0.08%

c) 0.67 - 0.26 = 0.31%

d) 1.12 - 0.67 = 0.45%

e) 1.72 - 0.67 = 1.05%

f) 1.72 - 1.12 = 0.60%

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