Suppose that the current one-year Treasury-bill rate is 3.15 percent and the expected one-year rate 12 months from now is 4.25 percent. According to the unbiased expectations theory,what should be the current rate for a two-year Treasury security?
A)3.70 percent
B)4.15 percent
C)2.36 percent
D)4.74 percent
E)5.50 percent

Question

Quizplus · Accepted Answer

The unbiased expectations theory suggests that the current rate on a two-year Treasury security should be the average of the current one-year rate and the expected one-year rate one year from now. Thus, the calculation is (3.15% + 4.25%) / 2 = 3.70%.

Suppose That the Current One-Year Treasury-Bill Rate Is 3