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8 May, 16:35

One-year T-bills currently earn 0.38 percent. You expect that one year from now, one-year T-bill rates will increase to 0.44 percent.

If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

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  1. 8 May, 16:47
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    One year T-bill earns 0.38

    One year T-bill rates increase 0.44

    Ubiased expectation theory:

    R2 = [ (1+R1) (1+E (R1)) ]^1/N - 1

    So, R2 = [ (1 + 0.0038) (1 + 0.0044) ]^1/2 - 1 = 0.41%
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