Suppose the term structure of interest rates has these spot interest rates:r₁= 5.5%.r₂= 5.3%,r₃= 5.1%, andr₄= 4.9%.

a.What will be the 1-year spot interest rate in three years if the expectations theory of term structure is correct?(Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

1-year spot in 3 years_______________%

b.If investing in long-term bonds carries additional risks, then how would the risk equivalent of a 1-year spot rate in three years relate to your answer to part (a)?

• Less than
• Greater than
• Equal to