Homer Simpson is considering two alternative investments. The first alternative is to invest in an instrument that matures in two years. The second alternative is to invest in an instrument that matures in one year and at the end of one year, reinvest the proceeds in a one-year instrument. He believes that one-year interest rates one year from now will be higher than they are today and therefore is leaning in favor of the second alternative. Homer has heard that the forward rate and spot rate will help him in his investment decision but doesnt understand why. What can you tell Homer about forward and spot rates?

		The one-year forward rate is the rate that will make the two choices equal. This rate is referred to as the markets expected future one-year spot rate one year from now.
		The one-year spot rate is the rate that will make the two choices equal. This rate is referred to as the markets expected future one-year forward rate one year from now.
		If one year from now, the one year spot rate is higher than the forward rate, Homer will lose money if he chooses the second investment alternative.
		none of the above