The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.

Based on the pure expectations theory, is the following statement true or false?

The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds.

True

False

The yield on a one-year Treasury security is 5.3800%, and the two-year Treasury security has a 7.2630% yield. Assuming that the pure expectations theory is correct, what is the markets estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

9.1796%

10.4647%

7.8027%

11.6581%

Recall that on a one-year Treasury security the yield is 5.3800% and 7.2630% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.35%. What is the markets estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

8.4683%

7.1981%

10.7547%

9.6539%

Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the markets estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)

6.53%

6.69%

7.10%

6.45%