Suppose that the one-year spot rate y 0 , 1 of interest is 5%. Investors are expecting
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Suppose that the one-year spot rate y0,1 of interest is 5%. Investors are expecting that the one-year spot rate one year from now will increase to 7%; thus, the one-year forward rate y1,2 on a loan originated in one year is 7%. Furthermore, assume that the three-year spot rate equals 7% as well. What is the anticipated one-year forward rate y2,3 on a loan originated in two years based on the pure expectations hypothesis?
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The threeyear rate is based on a geomet...View the full answer
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