Under the expectations theory if the current 10-year bond rate is 5.5%, and the current 5-year bond rate is 3.5%, what is the expected (forward) rate for a 5-year bond in 5 years from now?

Name: Under the expectations theory if the current 10-year bond rate is 5.5%, and the current 5-year bond rate is 3.5%, what is the expected (forward) rate for a 5-year bond in 5 years from now?
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Question

Quizplus · Accepted Answer

Exp. 5-year bond rate = [(1.055)^10/(1.035)^5]^1/5 - 1 
= [1.70815/1.1877]^.20 - 1 = [1.4382]^.20 - 1 =.075 or 7.5%

Under the Expectations Theory If the Current 10-Year Bond Rate