Homework Answers
Based on Expectations Theory,
(1 + 2 Yr Rate)2 = (1 + 1 Yr Rate) * (1 + 1 Yr Rate 1 Yr from now)
(1 + 6%)2 = (1 + 4%) * (1 + 1 Yr Rate 1 Yr from now)
(1 + 1 Yr Rate 1 Yr from now) = 1.1236/1.04
(1 + 1 Yr Rate 1 Yr from now) = 1.0804
1 Yr Rate 1 Yr from now = 8.04% --> Answer C
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Assume that the 1-year rate is 4% and the 2-year rate is 6%. Based on the...
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