I need help with getting two interpretations for the following forward rate (The two-year forward rate...

Question

Question

I need help with getting two interpretations for the following forward rate (The two-year forward rate one year from now is 2%).

Answer 1

Answer #1

As per the pure expectations hypothesis, the two year forward rate one-year from now is 2%.

This implies that:

1) Inflation one year from now is expected to be less than 2% over a two year period.

2) One year from now, $1 invested would provide a value of 1*(1+2%)^2 = 1.0404 in two years time from the time of investment that is at year = 3

Answer 2

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