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12. Suppose the 7-year spot interest rate is 9 percent and the 2-year spot rate is 6 percent. The forecasted 3-year rate two years from
12. Suppose the 7-year spot interest rate is 9 percent and the 2-year spot rate is 6 percent. The forecasted 3-year rate two years from now is 7.25 percent. What is the implied forward rate on a 2-year bond originating 5 years from now? {HINT: Under the expectations hypothesis, in equilibrium an investor with a 7-year holding period will be indifferent between investing in a 7-year bond or a combination of securities over the same period.}
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