Suppose that the current one-year rate (one-year spot rate) and expected oneyear T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively)

are as follows:

1 R 1 = 6% E ( 2 r 1 ) = 7% E ( 3 r 1 ) = 7.5% E ( 4 r 1 ) = 7.85%

Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. Plot the resulting yield curve.

Transcribed Image Text:

1R = 6% E(21)=7% E(3r) = 7.5% E(4r1)= 7.85%