Question

The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.

Based on the pure expectations theory, is the following statement true or false?

The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now.

1. False
2. True

The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury security has a 7.2630% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

1. 11.6581%
2. 9.1796%
3. 7.8027%
4. 10.4647%

Recall that on a one-year Treasury security the yield is 5.3800% and 7.2630% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.15%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

1. 7.5433%
2. 8.8745%
3. 10.1169%
4. 11.2706%

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? (Note: Do not round your intermediate calculations.)

1. 6.61%
2. 6.45%
3. 7.10%
4. 5.46%

Answer 1

ANSWERS : FALSE, b : 9.1796%, b : 8.8745%, b :6.45%