Explore BrainMass
Share

# FINANCE - EXPECTED INTEREST RATE - Unbiased Expectations Theory

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

3. [5] Suppose we look in the newspaper and find the following rates: the rate on 1-year securities is 4.65%, on a similar 2-year security 6.24%, and a 3-year security 6.67%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now?

#### Solution Preview

THE UNBIASED EXPECTATIONS THEORY

TO FIND THE INTEREST RATE FOR PERIOD 1:

Step 1
Add one to the 2-year security's interest rate. Which results in 1.0624

Step 2
Square this figure.
1.0624*1.0624 = 1.12896376

Step 3
Divide this figure by ...

#### Solution Summary

Suppose we look in the newspaper and find the following rates: the rate on 1-year securities is 4.65%, on a similar 2-year security 6.24%, and a 3-year security 6.67%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now?

\$2.19
Similar Posting

## International Finance

Exchange Rate Relationships. Define each of the following theories in a sentence or simple equation.
a. Interest rate parity theory.
b. Expectations theory of forward rates.
c. Law of one price.
d. International Fisher effect

Heading Exchange Rate Risk. An importer in the United States is due to take delivery of silk scarves
from Europe in 6 months. The price is fixed in euros. Which of the following transactions could
eliminate the importer's exchange risk?