Assume the Current Interest Rate on a One-Year Treasury Bond

question 75

Multiple Choice

Assume the current interest rate on a one-year Treasury bond (₁R₁) is 5.00 percent, the current rate on a two-year Treasury bond (₁R₂) is 5.75 percent, and the current rate on a three-year Treasury bond (₁R₃) is 6.25 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, ₃f₁?

• A) 5.00 percent
• B) 5.67 percent
• C) 7.26 percent
• D) 8.00 percent

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Definitions:

Sign Test

A non-parametric test used to determine if there is a significant difference between paired observations, based on the direction of differences rather than the size.

T Test

A statistical test used to compare the means of two groups, or a sample mean to a known value, to determine if they are significantly different from each other.

Sign Test

A non-parametric test used to determine if there is a statistically significant difference between paired observations.

Matched Pairs

A study design where subjects are paired based on certain criteria, with one member of each pair receiving the treatment and the other serving as a control.