The one-year spot rate is currently 4%; the one-year rate one year from now will be 3%; and the one-year rate two years from now will be 6%. (We assume that we know this for sure.) Under the unbiased expectations theory, what must today's three-year spot rate be? 

Suppose the three-year spot rate is actually 3.75%, how could you take advantage of this? Explain. 

Could these results be in line with an alternative theory for the term structure of interest rates? Explain.

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Under the unbiased expectations theory the expected oneyear spot rate two years from now is the geometric average of the oneyear spot rates for the ne... View the full answer