Unbiased Expectations Theory One-year Treasury bills currently earn 5.80 percent. You expect that one year from now, one- year Treasury bill rates will increase to 6.05 percent. If the unbiased expectations theory is correct, what should the current rate be on two-vear Treasury securities?
Unbiased Expectations Theory One-year Treasury bills currently earn 5.80 percent. You expect that one year from now, one- year Treasury bill rates will increase to 6.05 percent. If the unbiased expectations theory is correct, what should the current rate be on two-vear Treasury securities?
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Transcribed Image Text:**Unbiased Expectations Theory**: One-year Treasury bills currently earn 5.80 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.05 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?
Explanation: The unbiased expectations theory suggests that long-term interest rates are an average of current and expected future short-term interest rates. Therefore, the current rate on two-year Treasury securities would be the average of the current one-year rate (5.80 percent) and the expected one-year rate one year from now (6.05 percent).
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