Suppose that the current yield on a two-year government bond is 11% and the yield on an equivalent one-year bond is 8% p.a. Calculate the one-year forward rate of interest beginning in one year's time, assuming an investment of £100. Critically analyse.

How your answer can be explained in relation to the pure expectations theory?

Answer rating: 100% (QA)

Using the formula for calculating the oneyear forward rate of interest based on the current yield an... View the full answer