Chapter 6, Problem 7P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# EXPECTATIONS THEORY One-year Treasury securities yield 4.85%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.2%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average.

Summary Introduction

To identify: The yield of a 2-year treasury securities today.

Introduction:

Expectation Theory:

Expectation theory estimates the future interest without considering the maturity risk. According to the expectation theory, the yield curve of investment totally depends upon the future expectation of the investors.

Explanation

The items required for the calculation of a yield of 2-year treasury securities today are yield of 1-year treasury securities and the yield of 2-year treasury securities.

Given,

1-year treasury securities yield is 4.85% or 0.0485.

2-year treasury securities yield is 5.2% or 0.052.

Formula to calculate the yield of 2-year treasury securities today,

((1+Yieldātodayāforā2-yearāTreasuryāSecurities)2)=((1+Yieldāofā1-yearāTreasuryāSecurities)Ć(1+Yieldāofā2-yearāTreasuryāSecurities))

Substitute 0

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