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    Expectations Theory

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    Assume that a one-year Treasury securities yield 5%.The market anticipates that 1 year from now, one-year Treasury securities will yield 6%. So if the pure expectations theory is correct, what is the yield today for 2-year Treasury securities?

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    Expectations theory holds that (1 + r1) (1 + E(1r2) = (1 + r2) ^ ...

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