Correct Answer is 18.10

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Correct Answer is 0.1826

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Suppose we observe the 3 year rate (Ro,3) to be 12%, the expected one-year rate next year {E(r1,2)}to be 8%, and the expected one-year rate the following year {E(r2,3)}to be 10%. Further, assume L2=.05% and L3= .10%. Based on the Modified Expectations Hypothesis, what is the one-year rate? Suppose we observe the 3 year rate (R0,3) to be 12%, the expected one-year rate next year {E(r1,2)}to be 8%, and the expected one-year rate the following year {Er2,3)}to be 10%. Based on the Pure Expectations Theory, what is the one-year rate