The one-year interest rate is 4%.The interest rate for a two-year security is 6%.According to the unbiased expectations theory,the one-year interest rate one year from now must be equal to

Question

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According to the unbiased expectations theory, the expected future short-term rates can be derived from the current long-term rates. The formula is (1 + 2-year rate)^2 = (1 + 1-year rate) * (1 + expected 1-year rate in one year). Solving for the expected rate: (1.06)^2 = (1.04) * (1 + x), x ≈ 8.04%.

The One-Year Interest Rate Is 4