Using Equation 3-6 and the data in Figure 3-7 for May 2000, calculate one-year interest expected for year three.

Expectations Theory & Future Interest Rates

Figure 3-7

One-year Treasury Bill May 2000 6.33%

Two-year Treasury Bill May 2000 6.81%

Three-year Treasury note May 2000 6.77%

Formula 3-6:

(1+_t-1f_t) = (1+₀r_t)^t / (1+₀r_t-1)^t-1

r = a spot rate

f=an expected one-period future short-term rate

t=number of periods in the long-term rate