Problem 6-6 Unbiased Expectations Theory (LG6-7)

Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

1R1 = 3.06%, E(2r1) = 4.45%, E(3r1) = 4.95%, E(4r1) = 6.45%

Using the unbiased expectations theory, calculate the current (long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury securities. Plot the resulting yield curve. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

1. %

2. %

3. %

4. %