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

question 81

Multiple Choice

Suppose we observe the three-year Treasury security rate (₁R₃) to be 6 percent, the expected one-year rate next year E(₂r₁) to be 3 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) 3.00 percent
• B) 10.13 percent
• C) 14.00 percent
• D) 19.88 percent

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Definitions:

Marginal Value

Marginal value is the additional satisfaction or utility gained from consuming one more unit of a good or service.

Price Discriminate

The practice of selling the same product to different buyers at different prices based on their willingness or ability to pay.

Demand Curves

A graphical representation showing the relationship between the price of a good and the quantity of that good consumers are willing and able to purchase, typically downward sloping.

Marginal Value

The extra benefit or pleasure derived from using or making an additional unit of a product or service.