Interest rates on 4-year Treasury securities are currently 6.4%, while 6-year Treasury securities yield 7.4%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Expectations Theory | ||
4-yr. Treasury security yield | 6.40% | |
6-yr. Treasury security yield | 7.40% | |
Algebraic solution: | ||
Total return earned on 6-year securities | ||
Total return earned on 4-year securities | ||
Yield on 2-yr. securities, 4 years from now | ||
Geometric solution: | ||
1 + Total return earned on 6-year securities | ||
1 + Total return earned on 4-year securities | ||
Yield on 2-yr. securities, 4 years from now |
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.
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