Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.4%. If...

Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.4%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

Using Pure Expectations Theory,

(1 + r(4,2))² = (1 + 0.074)⁶/(1 + 0.07)⁴

r(4,2) = 8.20%

jeff jeffy answered 2 years ago

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