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One-year Treasury bills currently earn 2.90 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.40 percent and that two years from now, 1-year Treasury bill rates will increase to 3.80 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)Current Rate ______.__%

Question

One-year Treasury bills currently earn 2.90 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.40 percent and that two years from now, 1-year Treasury bill rates will increase to 3.80 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current Rate ______.__%

check_circleAnswer
Step 1

Calculate the current rate on 3-year t...

1
[(1+2.90%)x (1+3.40%) x (1+3.80%)]-1
-[1.104417468]-1
=1.05091268333768-1
0.05091268333768 or 5.09%
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1 [(1+2.90%)x (1+3.40%) x (1+3.80%)]-1 -[1.104417468]-1 =1.05091268333768-1 0.05091268333768 or 5.09%

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