Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now?

Question

Justice Nichols

Business

9 May, 20:14

Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now?

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Answers (1)

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Livia Ali · Answer 1

6.45%

Explanation:

A three year treasury rate two years from now is = ((1+6.20%) ^5 / (1+5.83%) ^2) ^ (1/3) - 1

(1+0.062) ^5 / (1+0.0583) ^2) ^ (1/3) - 1

= 6.45%