Deriving Current Interest Rates. Assume thatinterest rates for one-year securities are expected to be 0.04...

Deriving Current Interest Rates. Assume that interest rates for one-year securities are expected to be 0.04 today, 0.07 one year from now and 0.06 two years from now. Using only the pure expectations theory, what are the current interest rates on two-year securities. Enter the answer as a decimal using 4 decimals (e.g. 0.1234).

Expert Solution

Current Interest rates of two year securities:

((1 + 1 year security interest rate) * (1 + 1 years from now 1 year security interest rate))^(1/2) - 1

(1.04 * 1.07)^(1/2) - 1

1.1128^(1/2) - 1

1.0549 - 1

0.0549

Current Interest rates of two year securities = 0.0549

jeff jeffy answered 2 years ago

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