00:01
Hello shwans, we are going to write an interest rates on 4 year treasury securities are currently 5 .8 % while 6 year treasury securities yield 7 .95%.
00:11
If pure expectation theory is correct, what does the market believe that 2 year securities will be yielding 4 years from now, calculate the yield using a geometric average? so if i write here for this, this will come out.
00:27
So if i write here for this, so let's start with our answering part.
00:33
Two year, two year, after four year from today date, from today date.
00:46
This must be written as we are going to write here 1 plus ytm, raise to ytm, we are going to write here for this, raise to power 6 rage to power 6 divided by 1 plus ytm ytm we are going to write here for this raise to power 4 rase 2 power 4 this must be written as so this is ytm 6 and this is ytm 4 so raise to power 1 by 2 if i write here for this minus 1 so let's put all the values to make more clear this must be 1 plus 0 .0 so this is 7 .95 % 0 .075 raise to power 6 this must be divided by we are going to write here 1 .058 raise to power 4 raise to power 1 by 2 minus 1 so if i write here for this this is 1 .075 0 .0795 raise to power 6 and this is 1 .058.
02:04
1 .058.
02:07
So let's erase this to make it more clear, raise to power 4 and this whole is we are going to write here raise to power 1 by 2.
02:18
So let's erase this to make it more clear...