Question
Suppose the term structure of interest rates has these spot interest rates: r1 = 5.8%. r2 = 5.6%, r3 = 5.4%, r4 = 5.2%, and
Suppose the term structure of interest rates has these spot interest rates: r1 = 5.8%. r2 = 5.6%, r3 = 5.4%, r4 = 5.2%, and r5 = 6.8%.
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.)
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)?
Answer choices: Less than, Greater than or Equal to
**Please explain part b.
If there's a way to calculate this in excel, please show that method.
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