Suppose we observe the following rates: 1 R 1 = 4.6%, 1 R 2 = 6.8%. If the unbia

Question

Suppose we observe the following rates: 1R1 = 4.6%, 1R2 = 6.8%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Suppose we observe the following rates: 1R1 = 4.6%, 1R2 = 6.8%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Expected one-year interest rate =(1+ 1R2)^2/(1+ 1R1)^1 -1 =(1+.068)^2/(1+0.046)-1 =1.090463-1

Expected one-year interest rate =9.0463%

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