2. You want to know what 2-year spot rates will be one year from now. According to the pure expecta- tions theory, this unknown forward rate of interest is implied by current spot rates. The simplest method of calculating this forward rate is to use today's 1-year and 3-year spot rates; i.e., the spot rates that take you out to the start of, and to the end of the forward period of time you are interested in. Thus: (1 + R2 ) = (1 + R ). (1+F2): (1.0650) = (1.0575). (1+F212 F2 = [(1.0650) / (1.0575) 112-1 = 6.88% Notice that this is consistent with the upward-sloping current term structure: 2-year rates are 6.25% today, and the market expects this same spot rate to increase to 6.88% next year. Using the same logic as above, for the 1-year forward rate two years from now: (1 + R= (1 + R ). (1+2F): (1.0650) = (1.0625). (1 + 2) 2F1 = [(1.0650) / (1.0625)) - 1 = 7.00% 2. Suppose you measure the current term structure by observing the following yields on outstanding U.S. Treasury coupon STRIPS (assume today's date is February 15, 2019): Feb 2020 5.75% Feb 2021 6.25% Feb 2022 6.50% According to the pure expectations theory of the term structure, what is the market forecast for the risk-free yield on 2-year investments that will occur one year from today? What is the forecast for the 1-year forward rate two years from now