Excel Online Structured Activity: Expectations Theory

Interest rates on $4-$year Treasury securities are currently $5\mathrm{.}6\%,$ while $6-$year Treasury securities yield $7\mathrm{.}6\%.$ The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

If the pure expectations theory is correct, what does the market believe that $2-$year securities will be yielding $4$ years from now? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places.

fill in the blank $2$

$\%$ Expectations Theory

$4-$yr$.$ Treasury security yield $5\mathrm{.}60\%$

$6-$yr$.$ Treasury security yield $7\mathrm{.}60\%$

Algebraic solution: Formulas

Total return earned on $6-$year securities #N$/$A

Total return earned on $4-$year securities #N$/$A

Yield on $2-$yr$.$ securities$,4$ years from now #N$/$A

Geometric solution:

$1+$ Total return earned on $6-$year securities #N$/$A

$1+$ Total return earned on $4-$year securities #N$/$A

Yield on $2-$yr$.$ securities$,4$ years from now #N$/$A