According to the expectations hypothesis, What do you expect the interest rate on a two-year bond...
According to the expectations hypothesis, What do you expect the interest rate on a two-year bond to be three years from now? The current interest rates for different maturities are as follows:
| Maturity | Rate |
|---|---|
| 1-year | 3.00 |
| 2-year | 3.50 |
| 3-year | 3.75 |
| 4-year | 4.00 |
| 5-year | 4.00 |
Enter your answer as a percent without the % sign. Round your final answer to two decimals.
Homework Answers
(1+F2)^2 = [1+i5]^5 /[1+i3]^3
(1+F2)^2 = [1+.04]^5 /[1+ .0375]^3
(1+F2)^2 = [1.04]^5/[1.0375]^3
(1+F2)^2 = 1.21665/ 1.11677
(1+F2)^2 = 1.0894
Multiplying both sides by ^1/2
(1+F2)^1/2*2 = (1.0894)^1/2
(1+F2) = 1.0438
F2 = 1.0438 -1
= .0438 OR 4.38%
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