A 2-year,zero coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387.A 1-year,zero coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671.If the pure expectations theory is correct,for what price should 1-year,zero coupon Treasury bonds sell one year from now?
A)$797.54
B)$839.52
C)$883.70
D)$930.21
E)$976.72

Question

Quizplus · Accepted Answer

According to the pure expectations theory, the future interest rates can be derived from the current yield curve. The 1-year forward rate one year from now can be calculated using the formula: (1 + 2-year rate)^2 = (1 + 1-year rate) * (1 + 1-year forward rate). Solving for the 1-year forward rate and using it to discount the $1,000 maturity value gives the price of $930.21.

A 2-Year,zero Coupon Treasury Bond with a Maturity Value of $1,000