One-year Treasury securities yield 2.05%. The market anticipates that 1 year from now, 1-year Treasury securities...

One-year Treasury securities yield 2.05%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 2.5%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

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Expert Solution

Yield for 2-year Treasury securities = [(1 + One-year Treasury securities yield) * (1 + 1-year Treasury securities yield, one year from now)]^(1/2) - 1

Yield for 2-year Treasury securities = [(1 + 0.0205) * (1 + 0.025)]^(1/2) - 1

Yield for 2-year Treasury securities = 1.0460125^(1/2) - 1

Yield for 2-year Treasury securities = 1.0227475251 - 1

Yield for 2-year Treasury securities = 0.0227475251

Yield for 2-year Treasury securities = 2.27475251%

Yield for 2-year Treasury securities = 2.27%

jeff jeffy answered 2 years ago

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