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24 April, 19:38

Interest rates on 4-year Treasury securities are currently 5.4%, while 6-year Treasury securities yield 7.65%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now

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  1. 24 April, 21:09
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    12.3%

    Explanation:

    In this question, we are asked to calculate what is believed a 2-year market security will be yielding, 4 years from now

    To calculate this, we proceed mathematically;

    2 year yield 4 years from now = [ (1 + 0.0765) ^6 / (1 + 0.054) ^4]^1/2 - 1

    2 year yield 4 years from now = [ 1.5563 / 1.2341]^1/2 - 1 = 0.123

    2 year yield 4 years from now = 0.123

    2 year yield 4 years from now = 12.3%
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