Three-year Treasury securities currently yield 6%, while 4-year Treasury securities currently yield 6.5%. Assume that the expectations theory holds. What does the market believe the rate will be on 1-year Treasury securities three years from now

The correct answer is 8%.

Explanation:

According to the scenario, the computation of the given data are as follows:

Let 1 year Treasury securities = t

So, Four year Treasury = [ (Yield of 3 years Treasury * No. of year) + (t * No. of year) ] : Number of year

So, by putting the value, we get

6.5% = [ (6% * 3) + (t * 1) ] : 4

[ (6% * 3) + t] = 6.5% * 4

t = 8%

So, the rate on 1-year Treasury securities three years from now is 8%.