Unbiased Expectations Theory Suppose We Observe the Three-Year Treasury Security

question 5

Multiple Choice

Unbiased Expectations Theory 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%
• B) 10.13%
• C) 14.00%
• D) 19.88%

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