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Secure https://newconnect.mheducation.com/flow/connect.html CH2-Quiz 6 Saved Help Save & Exit Submit Suppose we observe the three-year Treasury security rate (1R3) to be 4.3 percent, the expected one-year rate next year -E(2r)-to be 4.8 percent, and the expected one-year rate the following year-E(3ri)-to be 5.6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate? Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) 2 points One-year Treasury security rate 00:18:33

Explanation / Answer

Based on unbiased expectations theory, short term interest rates are indicators of long term interest rates.

Mathematically, we can use this theorem to calculate the interest rate for a 1-year security.

(1 + 1R3)3 = (1 + 1R1) * (1 + 2R1) * (1 + 3R1)

(1 + 4.3%)3 = (1 + 1R1) * (1 + 4.8%) * (1 + 5.6%)

(1.1346) = (1 + 1R1) * (1.0827) * (1.0252)

(1 + 1R1) = 1.0252

1R1 = 0.0252

1R1 = 2.52%

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