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3 September, 09:04

The Wall Street Journal reports that the rate on four-year Treasury securities is 5.60 percent and the rate on five-year Treasury securities is 6.15 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury rate to be four years from today, E (5r1) ?

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  1. 3 September, 09:27
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    The market expect the one-year Treasury rate to be four years from today, E (5r1) to be 8.379%

    Explanation:

    1 + 1R5 = [ (1 + 1R4) ^4 (1 + E (5r1)) ]1/5

    1.0615 = [ (1.056) ^4 (1 + E (5r1)) ]1/5

    (1.0615) 5 = (1.0456) ^4 (1 + E (5r1))

    1 + E (5r1) = (1.0615) 5 / (1.0456) ^4

    E (5r1) = 8.379%

    Therefore, The market expect the one-year Treasury rate to be four years from today, E (5r1) to be 8.379%
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