Suppose We Observe the Three-Year Treasury Security Rate (₁R₃) to Be

Suppose we observe the three-year Treasury security rate (₁R₃) to be 11%, the expected one-year rate next year E(₂r₁) to be 4%, and the expected one-year rate the following year E(₃r₁) to be 5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, ₁R₁?

A) 18.57%
B) 10.19%
C) 23.19%
D) 25.24%

Correct Answer:

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