Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1 = 6%,  E(2r1) = 7%, E(3r1) = 7.5%, E(4r1) = 7.85% Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. (Round your answers to 2 decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

1R1 = 6%,  E(2r1) = 7%, E(3r1) = 7.5%, E(4r1) = 7.85%

Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. (Round your answers to 2 decimal places.)

Expert Solution
Step 1

Let L1 = Long term 1 year rate

L2 = Long term 2 year rate

L3 = Long term 3 year rate

L4 = Long term 4 year rate

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