Suppose we observe the following rates: ₁R₁ = 12%, ₁R₂ = 15%. 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 short-term rate can be calculated using the formula: (1 + ₁R₂)^2 = (1 + ₁R₁)(1 + E(₂r₁)). Solving for E(₂r₁) gives 18.0%.

Suppose We Observe the Following Rates: 1R1 = 12%, 1R2

Suppose We Observe the Following Rates: ₁R₁ = 12%, ₁R₂