Recall that on a one-year Treasury security the yield is 4.2300% and 5.0800% on
ID: 2772942 • Letter: R
Question
Recall that on a one-year Treasury security the yield is 4.2300% and 5.0800% 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? 6.3160% 5.5400% 4.7090% 7.0360% 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% 6.61% 6.69% 6.45%Explanation / Answer
Q 1. Yield on 2 year security excluding maturity risk premium = 4.88%
1f1 = ((1.0488)^2 / (1.0423) ) - 1
= 1.05534 - 1 = 0.5534 or 5.54%
Q 2.
( (1.062)^5/ (1.0583)^2 ) = (1+x%)^3
= 1.20616^1/3 = 1.06447
x= 1.06447-1 = 6.45%
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