A recent edition of The Wall Street Journal reported interest rates of 6.6 perce

Question

A recent edition of The Wall Street Journal reported interest rates of 6.6 percent, 6.95 percent, 7.25 percent, and 7.35 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory, what are the expected one-year rates for years 4, 5, and 6 (i.e., what are 4f1, 5f1, and 6f1)? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

A recent edition of The Wall Street Journal reported interest rates of 6.6 percent, 6.95 percent, 7.25 percent, and 7.35 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory, what are the expected one-year rates for years 4, 5, and 6 (i.e., what are 4f1, 5f1, and 6f1)? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

4f1 = [(1 + 1R4)^4/(1 + 1R3)^3] ? 1 = [(1 + 0.0695)^4/(1 + 0.066)^3] ? 1 = 8.01% 5f1 = [(1 + 1R5)^5/(1 + 1R4)^4] ? 1 = [(1 + 0.0725)^5/(1 + 0.0695)^4] ? 1 = 8.46% 6f1 = [(1 + 1R6)^6/(1 + 1R5^)5] ? 1 = [(1 + 0.0735)^6/(1 + 0.0725)^5] ? 1 = 7.85%

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