Question

1. Interest rates on 4-year Treasury securities are currently 5.7%, while 6-year Treasury securities yield 7.3%. 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.​

Answer 1

	4 year security yield=5.7%=	0.057
	6 year security yield=7.3%=	0.073
	Future Value of $1 investment for 6 year buying six year security now	1.526154	(1.073^6)
	Assume 2 year security yield after 4 years=r
	Future Value of $1 investment for 6 year with sequential investment( 4 year now and 2year after 4 years=(1.057^4)*(1+r)^2=1.248245*(((1+r)^2))			1.248245
	As Per Expectation theory, The Future values will be same
	1.248245*((1+r)^2)=1.526154
	((1+r)^2)=	1.222639
	1+r=	1.10573
	r=0.10573
	2 year security yield after 4 years=10.57%
	USING GEOMETRIC AVERAGE;
	Geometric Average yield by sequential invetment
	((1.057^4)*((1+r)^2))^(1/6))-1=0.073
	(1.057^4)*((1+r)^2)=1.073^6=	1.526154
	((1+r)^2)=	1.222639
	r=0.10573
	2 year security yield after 4 years=10.57%