Question

Question 1. Part A. Use the following information to answer the next four questions.

Suppose that the current one-year treasury rate is 3%. The rates for treasury securities that mature in years two through six are 3.25%, 2.80%, 2.95%, 3.30%, and 3.40%, respectively.

Based on the pure expectations hypothesis, what is the expected two year rate, three years from now? Round intermediate steps and your final answer to four decimals. Provide your answer in decimal format ( EX: .XXXX)

Part B. Based on the pure expectations hypothesis, what is the expected three year rate, three years from now?  

	a	.0492
	b	.0385
	c	.04
	d	.0587

Part C. Based on the pure expectations hypothesis, find the expected one year rate, three years from now. Round intermediate steps and the final answer to four decimals. Enter your final answer in decimal format    (EX: .XXXX).

Part D. Based on the pure expectations hypothesis, what is the expected two year rate, one year from today?   Round intermediate steps and your final answer to four decimals. Provide your answer in decimal format (EX: .XXXX)

Answer 1

	WORKSHEET:
	1 year rate 1 year from now = 1.0325/1.03-1 =	0.2427%
	1 year rate 2 years from now = 1.0280^3/1.0325^2-1 =	1.9059%
	1 year rate 3 years from now = 1.0295^4/1.0280^3-1 =	3.4013%
	1 year rate 4 years from now = 1.0336^5/1.0295^4-1 =	5.0164%
	1 year rate 5 years from now = 1.034^6/1.0336^5-1 =	3.6002%
	ANSWERS:
A)	Expected two year rate three years from now = (1.050164*1.036002)^(1/2)-1 =	4.3059%
B)	Expected three year rate three years from now = (1.03413*1.050164*1.036002)^(1/3)-1 =	4.0074%
C)	1 Year rate 3 years from now = 1.0295^4/1.0280^3-1	3.4013%
D)	Expected two year rate one year from now = (1.019059*1.034013)^(1/2)-1 =	2.6509%