Question

Suppose we observe the following rates: 1R 1 = 12 percent, 1R 2 = 15 percent. 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( 2r 1)?

Answer 1

one-year interest rate expected one year from now = [1+IR 2]^2 /[1+IR 1]^1   - 1

               = [1+.15]^2/[1+.12]   -1

              =[1.15]^2 /1.12    - 1

             = 1.3225/1.12       -1

              = 1.1808-1

                 = .1808 or 18.08%

answered by: anonymous