According to the Expectations Theory of interest rates, what would be the expected one-year rate, one...
According to the Expectations Theory of interest rates, what would be the expected one-year rate, one year from today if the current two-year rate is 7.15% and the current one-year rate is 6.55%?
(Please provide all calculations, will leave a thumbs up if correct)
Homework Answers
r(1,2) = 7.15%
r(1,1) = 6.55%
As per Expectation Theory,
(1 + r(1,2))2 = (1 + r(1,1))(1 + r(2,1))
(1.0715)2 = (1.0655)(1 + r(2,1))
r(2,1) = 7.75%
So,
One Year rate one year from today = 7.75%
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