Suppose the term structure of interest rates has these spot interest rates: r1 = 6.5%. r2 = 6.3%, r3 = 6.1%, and r4 = 5.9%.

a. What will be the 1-year spot interest rate in three years if the expectations theory of term structure is correct? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

1-year spot in 3 years %

b. If investing in long-term bonds carries additional risks, then how would the risk equivalent of a 1-year spot rate in three years relate to your answer to part (a)?

Less than

Greater than

Equal to

Answer rating: 100% (QA)

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