The Wall Street Journal reports that the rate on four-year Treasury securities is 2.1 percent and the rate on five-year Treasury securities is 2.8 percent.

The Wall Street Journal reports that the rate on four-year Treasury securities is 2.1 percent and the rate on five-year Treasury securities is 2.8 percent. According to the unbiased expectations theory, what does the market expect the one-year Treasury rate to be four years from today, E(5r1)?

 

Answer

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One year treasury rate four years from today = ((1 + 2.8%)^5 / (1 + 2.1%)^4) – 1
= 1.0565 – 1
= 5.65%

One year treasury rate four years from today = 5.65%