Oneyear Treasury bills currently earn 325 percent You expect

One-year Treasury bills currently earn 3.25 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.55 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

Solution

₁R₂= [(1 + .0325) (1 + .0355)]^.5- 1

₁R₂ = 3.40%

The current rate be on two-year Treasury securities is 3.40%