Question

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

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.​

 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%

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