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Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the...

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Finance

Suppose that the current 1-year rate (1-year spot rate) andexpected 1-year T-bill rates over the following three years (i.e.,years 2, 3, and 4, respectively) are as follows: 1R1 = 2.54%,E(2r1) = 3.80%, E(3r1) = 4.30%, E(4r1) = 5.80% Using the unbiasedexpectations theory, calculate the current (longterm) rates for 1-,2-, 3-, and 4-year-maturity Treasury securities. Plot the resultingyield curve.

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4.2 Ratings (513 Votes)
According to the unbiased expectations theory Interest earnedby investing in a long term bond should be equal to interest earnedby investing in successive short term bonds for same periodTherefore1rate of interest on twoyearbond2 1 current one year spot rate 1 expectedone year spot rate over    See Answer
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