The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.

Based on the pure expectations theory, is the following statement true or false?

The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now.

False

True

The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 7.5735% yield. Assuming that the pure expectations theory is correct, what is the markets estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

10.9138%

12.1583%

8.1375%

9.5735%

Recall that on a one-year Treasury security the yield is 5.6100% and 7.5735% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.3%. What is the markets estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

7.6187%

8.9632%

10.218%

11.3833%

Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the markets estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)

6.69%

6.61%

6.53%

6.45%