Question: 1.State the expectations theory and explain its significance.(3 marks) Using the generalized equation of the expectations theory of the term structure of interest rates, calculate

1.State the expectations theory and explain its significance.(3 marks)

Using the generalized equation of the expectations theory of the term structure of interest rates, calculate today's four-year rate, assuming that the current one-year, 6% rate is expected to rise by one percentage point in each of the next three years.

(7 marks)

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