Question 6-6

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: _1R_1 = 6%, E(_2r_1) = 7%, E(_3r_1) = 7.5%, E(_4r_1) = 7.85% 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. (LG6-5) Suppose that the current (1-year rate 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: _1R_1 = 1%, E(_2r_1) = 3.75%, E(_3r_1) = 4.25%, E(_4r_1) = 5.75% 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. (LG6-5) One-year Treasury bills currently earn 1.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities