Check My Work (3 remaining) O Click here to read the eBook: Using the Yield Curv

Question

Check My Work (3 remaining) O Click here to read the eBook: Using the Yield Curve to Estimate Future Interest Rates EXPECTATIONS THEORY rect, what does the market Interest rates on 4-year Treasury securities are currently 5.7%, while 6 year Treasury securities yield 7.9% If the pure expectations theory is O 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 O answer to two decimal places Check My Work (3 remaining) 5 9 5 2 3

Explanation / Answer

Yield on 4-year Treasury Securities, r4 = 5.70%
Yield on 6-year Treasury Securities, r6 = 7.90%

Let yield on 2-year securities will be 2r4 4 years from now.

(1 + r6)^2 = (1 + r4)^4 * (1 + 2r4)^2
(1 + 0.079)^6 = (1 + 0.057)^4 * (1 + 2r4)^2
1.079^6 = 1.057^4 * (1 + 2r4)^2
1.57808 = 1.24825 * (1 + 2r4)^2
(1 + 2r4)^2 = 1.26423
(1 + 2r4) = 1.1244
2r4 = 0.1244 or 12.44%

So, 2-year securities will yield 12.44% 4 years from now.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---