Interest rates on 4-year Treasury securities are currently 6.2%, while 6-year Tr

Question

Interest rates on 4-year Treasury securities are currently 6.2%, while 6-year Treasury securities yield 7.35%. 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. Interest rates on 4-year Treasury securities are currently 6.2%, while 6-year Treasury securities yield 7.35%. 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.

Explanation / Answer

(1 + 0.062)^4 * (1 + 4rT2)^2 = (1 + 0.0735)^6

(1 + 4rT2)^2 = (1 + 0.0735)^6 / (1 + 0.062)^4

4rT2 = 9.69%

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