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

Business

Keyla

9 September, 01:20

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?

+4

Answers (1)

Know the Answer?

Konnor Buck · 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%