One-year Treasury bills currently earn 1.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.)

1.55%

Explanation:

Computation of current rate to be on 2-year Treasury securities

Current rate (2) = ((1 + Current rate(1)) * (1+After a year rate(1))^(1/2) - 1

= ((1+1.45%)*(1+1/65%))^(1/2) - 1

= ((1+0.0145)*(1+0.0165))^(1/2) - 1

= ((1.0145)*(1.0165))^(1/2) - 1

= 1.03123925^(1/2) - 1

= 1.01549950763 - 1

= 0.01549950763

= 1.549951

= 1.55%

Thus, the current rate on 2-year treasury will be 1.55%

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