Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the...

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Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e.

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Answer 1

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long term rates for year

1 = 6%

2 : 1.06*1.07 = (1+r)^2 => r = .06498 = 6.5%

3 : 1.06*1.07*1.074 = (1+r)^3 => r = 0.068 = 6.8%

4 : 1.06*1.07*1.074*1.0775 = (1+r)^4 => r = 0.07035 = 7.04%

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