Following are the yields on selected Treasury securities Maturity Yield years years

Question

Following are the yields on selected Treasury securities:

Maturity Yield

2 years 1.6%

3 years 2.2

4 years 2.4

Using the expectations theory, compute the expected one-year interest rate in Year 3. That is, compute the rate that is expected to exist only during Year 3. (Base your answer on an arithmetic average rather than a geometric average.)

a. 2.2%

b. 1.6%

c. 3.4%

d. 1.9%

e. 3.0%

Answer

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