Suppose the term structure of interest rates has these spot interest rates: r1 = 5.4%. r2 = 5.2%, r3 = 5.0%, r4 = 4.8%, and r5 = 6.4%. 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)?

multiple choice

Less than

Greater than

Equal to