The pure expectations theory assumes that a one year bond purchased today will h
ID: 2741889 • Letter: T
Question
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 True The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 7.5700% 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? 8.1260% 10.8984% 9.5600% 12.1412% Recall that on a one-year Treasury security the yield is 5.6100% and 7.5700% 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 0.2000%. What is the market's estimate of the one-year Treasury rate one year from now? 10.4420% 7.7860% 11.6330% 9.1600% 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? 7.10% 6.69% 6.53% 6.45%Explanation / Answer
(1). Answer : 9.56%
Explanation: Yield on 2-year security = 7.57% = 0.0757
Yield on 1-year security = 5.61% = 0.0561
Let, yield on 1-year security purchased one year from now = x
According to Pure Expectation Theory;
(1.0561) * (1+x) = (1.0757)2
i.e. x = [ (1.0757)2 / (1.0561) ] - 1
i.e. x = 9.56%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.