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Using the pure expectations approach to the determination of interest rates, calculate the expected (E) rate of interest of a one-year investment that will be

Using the pure expectations approach to the determination of interest rates, calculate the expected (E) rate of interest of a one-year investment that will be available in 12 months' time (1i2), given the following data:

  • current rate of return on a one-year-to-maturity (0i1) instrument is 7.75% per annum
  • current rate of return on a two-year maturity (0i2) instrument is 8.25% per annum.

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