Answer :
Answer:
The answer is: the current rate on 2-year Treasury securities 1.95%.
Explanation:
Under the unbiased expectations theory, the return on holding 2-year T-bill should be equal to the return of holding 1 year T-bill now and then continue holding 1 year T-bill in 12 months time. So, we have:
Interest rate on 2-year Treasury (R02) = [ (1+Interest rate on one-year bill starting from now) * (1+Interest rate on one-year bill starting 12 months later)]^(1/2) - 1 = (1.0185 x 1.0205)^(1/2) -1 = 1.95%
So, the current rate on 2-year Treasury securities 1.95%.
Answer:
1.95%
Explanation:
If the unbiased expectations theory is correct, the formula for calculating the current rate on 2-year Treasury securities is as follows:
R2 = {[(1 + current one-year T-bill rate) × (1 + Expected one-year rate 12 months from now)]^1/2} − 1 ............. (1)
Where R2 denotes the current rate on 2-year Treasury securities
Substituting the values from the question into equation (1), we have:
R2 = {[(1 + 0.0185) × (1 + 0.0205)]^1/2} − 1
= {[1.0186 × 1.0205]^1/2} − 1
= {1.0394813^1/2} − 1
= 1.01954955740268 − 1
= 0.01954955740268
R2 = 0.0195, or 1.95% approximately.