Chapter 6 Interest Rates 193g. What is the pure expectations theory? What does the pure expectations theory imply about the term struc-
ture of interest rates?
h. Suppose you observe the following term structure for Treasury securities:
Maturity Yield
1 year 6.0%
2 years 6.2
3 years 6.4
4 years 6.5
5 years 6.5Assume that the pure expectations theory of the term structure is correct. (This implies that you can use the
yield curve provided to “back out” the market’s expectations about future interest rates.) What does the
market expect will be the interest rate on 1-year securities 1 year from now? What does the market expect
will be the interest rate on 3-year securities 2 years from now?