Based on expectation theory, if the interest rate for a 3-year bond is 8% and the...
Based on expectation theory, if the interest rate for a 3-year bond is 8% and the interest rate on a 1-year bond right now is 9%, a one year bond a year from now is 9%, what is the expected one year bond interest rate 2-years from now?
Answer this questions using the simplified averaging assumption from page 95.
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Homework Answers
EXACT:
Expected one year bond interest rate 2 years from now=(1+rate for 3
years)^3/((1+rate for 1 year)*(1+rate for 1 year 1 year from
now))-1=1.08^3/(1.09*1.09)-1=6.0274%
APPROXIMATE:
Expected one year bond interest rate 2 years from now=rate for 3
years*3-rate for 1 year-rate for 1 year 1 year from
now=8%*3-9%-9%=6%
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