Today, interest rates on 1-year T-bonds yield 1.4%, interest rates on 2-year T-bonds yield 2.5%, and interest rates on 3-year T-bonds yield 3.6% a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. 3.6119 % Correct Check My Work Feedback Review what is meant by the pure expectations theory and its assumptions. Determine the 2 options available to your investor that set up the mathematical equation to solve for the unknown yield. Assume that the market is in equilibrium and set up the mathematical equation which sets forth the 2 options and uses the geometric average. Be careful about your math and make sure that you understand how to use your calculator/spreadsheet exponential function. O b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations Do not round intermediate calculations. Round your answer to four decimal places.

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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.