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Spot rates today look like this 1-year3% 2-year3.75% Suppose the market is dominated by investors who have a natural preference for longer term investments. These
Spot rates today look like this
1-year3%
2-year3.75%
Suppose the market is dominated by investors who have a natural preference for longer term investments. These investors can only be induced to hold a sequence of two, 1-year bonds if they believe that the expected return from doing so is greater than the return they can earn on one, 2-year bond by 0.25% per year.Given this condition and the spot rates above, what is the expected 1-year spot rate nextyear?
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