Based on the pure expectations theory, is the following statement true or false?

Question

Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-tern bonds. O True O False The yield on a one-year Treasury security is 4.690090, and the two-year Treasury security has a 5.6300% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rat one year from now? o 7.5012% 0 6.5800% o 8.3566% O 5.593096 Recall that on a one-year Treasury security the yield is 4.6900% and 5.6300% 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 0.1500%, what is the market's estimate of the one-year Treasury rate one year from now? O 7.976096 O 6.280096 0 5.3380% O 7.159090

Explanation / Answer

1)

Pure expectations theory assumes, interest rate on long-term securities is a geometric average of the past returns. These calculations do not include the consideration for liquidity premium or default risk premium.

Hence, given statement is True.

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