Say the current one-month interest rate is 3.75%.Further,the three-month rate is 6.25%.According to the expectation theory,what is the predicted rate for the coming two-month period?

Question

Quizplus · Accepted Answer

The expectations theory suggests that longer maturity yields are a function of the current interest rates and expected future interest rate.Using equation 5.14,page 152,we can find the predicted rate for the coming two-month period as follows: [(1 + 0.0625 F1F1F1S1F1F1F10 3/12)/(1 + 0.0375 F1F1F1S1F1F1F10 1/12)- 1] F1F1F1S1F1F1F10 6 = 0.0747 or 7.48% p.a.

Say the Current One-Month Interest Rate Is 3 7.23% 7.23 \% 7.23%

Say the Current One-Month Interest Rate Is 3 $7.23 \%$