Forecasting Interest Rates Assume the Current Interest Rate on a One-Year

Forecasting Interest Rates Assume the current interest rate on a one-year Treasury bond (₁R₁) is 5.00 percent, the current rate on a two-year Treasury bond (₁R₂) is 5.75 percent, and the current rate on a three-year Treasury bond (₁R₃) is 6.25 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, ₃f₁?

A) 5.00%
B) 5.67%
C) 7.26%
D) 8.00%

Correct Answer:

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