Suppose that the current one-year rate one-year spot rate

Question

Unbiased Expectations Theory

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

₁R₁=4.60%,   E(₂r₁) =5.60%,     E(₃r₁) =6.10%,   E(₄r₁)=6.45%

Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

5.6852%

6.4500%

1.5750%

5.6875%