**Topic: Understanding Treasury Bill Yields and Market Expectations****Transcription:**Three-year Treasury bills currently yield 6 percent. Four-year Treasury bills currently yield 6.5 percent. Assume that the expectations theory holds. What does the market believe the rate will be on one-year Treasury securities three years from now?a. 8.0% b. 8.5% c. 9.0% d. 9.5% e. 10.0%**Explanation:**The problem presented involves applying the expectations theory of interest rates to predict future one-year rates based on current yields of multi-year Treasury securities. By understanding the relationship between the yields of the three-year and four-year Treasury bills, and assuming the expectations theory is accurate, it is possible to infer the market’s expectations for interest rates on one-year Treasury securities three years from now. This involves calculating the implied forward rate using given yield data.

Three-year Treasury bill current yield is 6%.Four-year Treasury bill current is 6.5%.

Three-year Treasury bills currently yield 6 percent. Four-year Treasury Assume that the expectations theory bills currently yield 6.5 percent. holds. What does the market believe the rate will be on one-year Treasury securities three years from now? a. 8.0% b. 8.5% c. 9.0% d. 9.5% e. 10.0%

Three-year Treasury bills currently yield 6 percent. Four-year Treasury Assume that the expectations theory bills currently yield 6.5 percent. holds. What does the market believe the rate will be on one-year Treasury securities three years from now? a. 8.0% b. 8.5% c. 9.0% d. 9.5% e. 10.0%

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

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

**Topic: Understanding Treasury Bill Yields and Market Expectations**

**Transcription:**

Three-year Treasury bills currently yield 6 percent. Four-year Treasury bills currently yield 6.5 percent. Assume that the expectations theory holds. What does the market believe the rate will be on one-year Treasury securities three years from now?

a. 8.0%
b. 8.5%
c. 9.0%
d. 9.5%
e. 10.0%

**Explanation:**

The problem presented involves applying the expectations theory of interest rates to predict future one-year rates based on current yields of multi-year Treasury securities. By understanding the relationship between the yields of the three-year and four-year Treasury bills, and assuming the expectations theory is accurate, it is possible to infer the market’s expectations for interest rates on one-year Treasury securities three years from now. This involves calculating the implied forward rate using given yield data.

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