Suppose the 8-year spot interest rate is 8 percent and the 4-year spot rate is 7 percent. The forecasted 2-year rate four years from now is 6.25 percent. What is the implied forward rate on a 2-year bond originating 6 years from now? (HINT: Under the expectations hypothesis, in equilibrium an investor with an 8-year holding period will be indifferent between investing in an 8-year bond or a combination of securities over the same period.)

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SOLUTION The expectations hypothesis of the term structure of interest rates states that the yield c... View the full answer