3. Unbiased Expectations Theory One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?
According to the Unbiased Expectations Theory, the current rate on a two-year Treasury security can be calculated by taking the average of the expected future rates over the two-year period.
In this case, the current rate on one-year Treasury bills is 5.50% and you expect that one year from now, the rate will increase to 5.75%.
To find the current rate on a two-year Treasury security, we need to calculate the average of these expected future rates.
Step 1: Calculate the average
(5.50% + 5.75%) / 2 = 5.625%
Therefore, based on the Unbiased Expectations Theory, the current rate on two-year Treasury securities should be 5.625%.