Question

"Suppose that the current one year T-Bill rate and one year expected rates over the next three years are as follows: 6%, 7%, 7.5% and 7.85%.

Using the Unbiased Expectations Theory calculate the current long term rates for two, three and four year maturities."

Answer 1

The Unbiased Expectations Theory suggests that long-term interest rates are equal to the average of expected short-term rates over the same period.

Step-by-step explanation:

The Unbiased Expectations Theory suggests that the long-term interest rates are equal to the average of the expected short-term rates over the same period. To calculate the current long-term rates for two, three, and four-year maturities, we average the expected rates over those periods. In this case, the expected rates are 7%, 7.5%, and 7.85% for the three years, respectively.

Therefore, the current long-term rates for two, three, and four-year maturities would be 7%, 7.5%, and 7.85%, respectively.