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 = 6%, E(₂r₁) = 7%, E(₃r₁) = 7.5%, E(₄r₁) = 7.85%

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

Note: Round your percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).

Years Current (long-term) rates

1 %

2 %

3 %

4 %