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Actual interest rates for one and four-year bonds are 5.25% and 5.95% respectively. Using expectations theory,...

Actual interest rates for one and four-year bonds are 5.25% and 5.95% respectively.

Using expectations theory, what is the expected interest rate for a three-year bond one year from today?

Please show the equation you are plugging numbers into as well. I can't figure out how to calculate this without 1R3 or one of the expected rates being given up front. Help!!

-----------the answer is not 6.18---------

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Answer #1
A B C D E F G H I
2
3 Year Actual Interest rate
4 1 5.25%
5 4 5.95%
6
7 Let interest rate for 3 Year Bond starting 1 Year from today is 1R3 then,
8 (1+5.25%)1*(1+1R3)3 = (1+5.95%)4
9
10 Solving the above equation,
11 1R3 6.1844% =((((1+D5)^C5)/((1+D4)^C4))^(1/3))-1
12
13 Hence interest rate for 3 year bond starting 1 Year from today is 6.1844%
14
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