Suppose That the Current One-Year Rate (One-Year Spot Rate) and Expected

question 117

Multiple Choice

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4 respectively) are as follows:
₁R₁ = 5 percent,
E(₂r₁) = 6 percent,
E(₃r₁) = 7.5 percent
E(₄r₁) = 7.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for three-year- and four-year-maturity Treasury securities.

• A) one-year: 6.16 percent, two-year: 6.58 percent
• B) one-year: 6.16 percent, two-year: 6.78 percent
• C) one-year: 6.25 percent, two-year: 6.45 percent
• D) one-year: 5.95 percent, two-year: 6.45 percent

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