1. Suppose the interest rate on a 2-year treasury security is 4.75% and the interest rate on a 5-year treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the 3-year treasury rate two years from now?
-6.53%
-7.10%
-6.85%
-7.18%
-6.45%
2. Now assume that the 2-year treasury requires a 0.15% maturity risk premium and the 5-year treasury rate has a 0.30% maturity risk premium. The interest rate on a 2-year and 5-year treasury securities is 4.75% and 6.20% respectively. What is the market’s estimate of the 3-year treasury rate two years from now?
-6.61%
-6.53%
-6.37%
-6.13%
-6.78%