From the expectations theory of term structure we know,
Where r2 is the two year maturity interest rate
is the forward rate for 1 year investment starting in one year from now=8%=.08
is the one year maturity rate.=10%=.1
Therefore
(1+r2)^2=1.188
1+r2=1.089
Therefore,r2=.0899=8.99%
Therefore r2 is between 8% and 10%.
The current market interest rate for one year maturity bond is 10%. The forward rate for...
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