Assume the unbiased expectations theory is true throughout this question.

A. The current one-year Treasury bill rate is 5.2 percent and the expected one-year rate 12 months from now is 5.8 percent. What should be the current rate for a two-year Treasury security?

B. Suppose we observe the following rates: current one-year rate 1R1 = 8%, current two-year rate 1R2 = 10%. What is the one-year interest rate expected one year from now, E(2r1)?

C. Suppose the yield curve is inverted (i.e., interest rates/yields of longer maturity Treasuries are lower than that of shorter maturity Treasuries). What does this imply about the expectation of the movement of short-term interest rates in the future? Will it go up, go down, or stay roughly unchanged?

Answer rating: 100% (QA)

A The current oneyear Treasury bill rate is 52 and the expected oneyear rate 12 months from now is 5... View the full answer