Question

Suppose that the interest rate on a​ one-year Treasury bill is currently 7​% and that investors expect that the interest rates on​ one-year Treasury bills over the next three years will be 8​%, 9​%, and 7​%. Use the expectations theory to calculate the current interest rates on​ two-year, three-year, and​ four-year Treasury notes. The current interest rate on​ two-year Treasury notes is______%.

​(Round your response to two decimal​ places.)The current interest rate on​ three-year Treasury notes is

______​%.

​(Round your response to two decimal​ places.)The current interest rate on​ four-year Treasury notes is

_______​%.

​(Round your response to two decimal​ places.)

Enter your answer in each of the answer boxes.

Answer 1

Formula:

Treasury rate for n period = ((1+ Year1 rate) x (1+ Year2 rate) x….. x (1+ nth Year rate))^(1/n) - 1

a.

Current interest for two-year treasury note:

2-Year interest rate = (((1+7%)*(1+8%))^(1/2) – 1

2-Year interest rate = 7.50%

b.

Current interest for three-year treasury note:

3-Year interest rate = (((1+7%) x (1+8%) x (1+9%))^(1/3) - 1

3-Year interest rate = 8.00%

c.

Current interest for three-year treasury note:

4-Year interest rate = (((1+7%) x (1+8%) x (1+9%) x (1+7%))^(1/4) - 1

4-Year interest rate = 7.75%