Question
P6-2 Unbiased Expectations Theory Suppose that the current one-year rate (one- year spot rate) and expected one-year T-bill rates over the following three years (i.e.,
P6-2 Unbiased Expectations TheorySuppose that the current one-year rate (one- year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1=7%, E(2r1) =9%, E(3r1) =6.0% E(4r1)=4%
Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. Show your answers in percentage form to 3 decimal places.
Note that:
Rate for a two year security
=[(1 +1R1)(1 + E(2r1))]1/2- 1Rate for a three year security
=[(1 +1R1)(1 + E(2r1))(1 + E(3r1))]1/3- 1
Rate for a four year security
=[(1 +1R1)(1 + E(2r1))(1 + E(3r1))(1 + E(4r1))]1/4- 1
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