QUESTION 31

1. B1

   The current spot rates (annualized) for maturities expressed in days are:

   ₀i₁₀=3.5%, ₀i₃₀=4%, ₀i₆₀=5%, ₀i₉₀=6% and ₀i₁₂₀=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.]

   Assuming that the expectations theory of interest rates holds, derive the market expectations ₃₀i^e₆₀ implicit in the above term structure. Answer the question assuming daily compounding, and 365 days in a year.

   Explain all the steps of your argumentation and show all the details of your calculations.