Currently, 3-year Treasury securities yield 5.4%, 7-year Treasury securities yield 5.8%, and 10-year Treasury securities yield 6.2%. If the expectations theory is correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today?

1.99%

Explanation:

If the expectations theory is correct, then the yield on 3-year Treasury securities seven years from today should be equal to 10-year Treasury securities yield 6.2%.

↔ 5.4% * (1 + expected yield) ^7 = 6.2%

↔ (1 + expected yield) ^7 = 6.2%/5.4% = 1.15

↔ 1 + expected yield = 1.15^ (1/7) = 1.0199

-> Expected yield' = 0.0199 = 1.99%