Homework Answers
15]
As per expectations theory, investing for 2 years at the 2-year rate should result in the same ending value as investing for 1 year at the 1-year rate, and reinvesting the proceeds after 1 year at the 1-year rate 1 year from now.
Let us say the 1-year rate 1 year from now is R. Then :
(1 + 6.0%)2 = (1 + 3.0%) * (1 + R)
R = (1.062 / 1.03) - 1
R = 9.09%
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