Suppose the term structure of interest rates has these spot interest rates: r1 = 6.6%. r2 = 6.4%, r3 = 6.2%, r4 = 6.0%, and r5 = 7.6%.

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)?

a. Less than

b. Greater than

c. Equal to