Assuming that the expectations theory of interest rates holds, derive the market expectations ₂i^e₈ implicit in the above term structure. Answer the question assuming monthly compounding.

Explain all the steps of your argumentation as well as the theory you use and show all the details of your calculations. Interpret your result.

The current spot rates (annualized) for maturities expressed in months are: 011=3.5%, 012=4%, 016=5%, 0110=6% and 0112=6.5%. The first subscript refers to the starting date of the investment while the second subscript refers to the term/maturity of the investment. [Note that the second subscript is NOT a date but a length.]