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Actual interest rates for one and four-year bonds are 5.25% and 5.95% respectively. Using expectations theory,...

Actual interest rates for one and four-year bonds are 5.25% and 5.95% respectively.

Using expectations theory, what is the expected interest rate for a three-year bond one year from today?

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Answer #1

3-year interest rate one-year from now:

= ((1+5.95%)^4/(1+5.25%))^(1/3)-1

= 6.18%

Hence, expected interest rate for a three-year bond one year from today is 6.18%.

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