Suppose we observe the three-year Treasury security rate ( 1 R 3 ) to be 5.7 per
ID: 2823456 • Letter: S
Question
Suppose we observe the three-year Treasury security rate (1R3) to be 5.7 percent, the expected one-year rate next year—E(2r1)—to be 6.3 percent, and the expected one-year rate the following year—E(3r1)—to be 6.7 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))
Suppose we observe the three-year Treasury security rate (1R3) to be 5.7 percent, the expected one-year rate next year—E(2r1)—to be 6.3 percent, and the expected one-year rate the following year—E(3r1)—to be 6.7 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))
Explanation / Answer
the one-year Treasury security rate = 1.057^3/1.063*1.067 - 1
the one-year Treasury security rate = 4.12%