Suppose we observe the following rates: ₁R₁ = 12 percent, ₁R₂ = 15 percent. 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)?

Question

Quizplus · Accepted Answer

According to the unbiased expectations theory, the expected future one-year rate can be calculated using the formula: (1 + ₁R₂)^2 = (1 + ₁R₁)(1 + E(₂r₁)). Solving for E(₂r₁) gives approximately 18.0 percent.

Suppose We Observe the Following Rates: 1R1 = 12 Percent

Suppose We Observe the Following Rates: ₁R₁ = 12 Percent