Suppose that the yield curve for the next 3 years is given by (there are no liquidity premia):

Maturity	Spot Rate
1	6%
2	8%
3	10%

1. Calculate the forward rate for one year, one year from now f1,1.

2. Calculate the forward rate for one year, two years from now f1,2.

3. Calculate the forward rate for two years, one year from now f2,1.

4. According to the Expectations Theory, interest rates are expected to increase, decrease or remain stable in the future?

Answer rating: 100% (QA)

To calculate the forward rates we can use the formula 1 s n 1 r n 1 f m Where s spot rate r current ... View the full answer