The yield on a one-year Treasury security is 5.8400%, and the two-year Treasury security has a 8.7600% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

Market estimate of the one year treasury rate one year from now is 11.76%

Explanation:

The formula for pure expectations theory used in forecasting future interest rate is given below:

One year interest rate = (1+r2) ^n+1 / (1+r1) ^n-1

r2 is the forecast interest rate in two years which is 8.7600%

r1 is the forecast interest rate in year 1 which i 5.8400%

n is one year from now

one year interest rate = (1+8.7600%) ^2 / (1+5.8400%) ^1-1

one year interest rate = (1+0.087600) ^2 / (1+0.058400) ^1-1

=1.087600^2 / (1.058400) ^1-1

=1.18287376 / 1.058400-1

=1.117605593-1

=0.117605593

=11.76%