Suppose We Observe the Three-Year Treasury Security Rate (₁R₃) to Be

question 112

Multiple Choice

Suppose we observe the three-year Treasury security rate (₁R₃) to be 11 percent, the expected one-year rate next year E(₂r₁) to be 4 percent, and the expected one-year rate the following year E(₃r₁) to be 5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, ₁R₁?

• A) 18.57 percent
• B) 10.19 percent
• C) 23.19 percent
• D) 25.24 percent

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