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How do you calculate the expected yield of a Treasury security if the pure expectations theory is correct?

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Interest rates on 4-year Treasury securities are currently 7 percent, while interest rates on 6-year Treasury securities are currently 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now?

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Solution Summary

Using expectation theory, the yield on 2-year securities 4 years from now is calculated. Work and answers are shown and briefly explained.

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Interest rate on 4 year Treasury security=7%

Interest rate on 6 year Treasury security=7.50%

Let the principal be equal to 1

Amount after 6years from ...

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