one-year treasury bills currently earn 3

Finance Oct 07, 2020

one-year treasury bills currently earn 3.45 percent. you expect that one year from now, one-year treasury bill rates will increase to 3.95 percent. if the unbiased expectations theory is correct,what should the current rate be on two year treasury securities?

Expert Solution

Treasury bill earn= 3.45%

Treasury bill increase= 3.95%

Current rate= r= ?

therefore,

=> (1+3.45%)* (1+ 3.95%) = (1+r)²

1.075363 = (1 + r)²

1.036997= 1 + r

r = ( 1.036997 -1)

= 0.036997 or 3.70%

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