Suppose that the one-year spot rate y 0 , 1 of interest is 5%. Investors are expecting
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Suppose that the one-year spot rate y0,1 of interest is 5%. Investors are expecting that the one-year spot rate one year from now will increase to 6%; thus, the one-year forward rate y1,2 on a loan originated in one year is 6%. Furthermore, assume that investors are expecting that the one-year spot rate two years from now will increase to 7%; thus, the one-year forward rate y2,3 on a loan originated in two years is 7%. Based on the pure expectations hypothesis, what is the three-year spot rate?
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