According to the expectations theory, what is the one-year forward rate three years from now if three and four-year spot rates are 5.50% and 5.80%, respectively?
A) The rate cannot be calculated from the information above.
B) 6.2%
C) 6.7%
D) 5.6%
E) 5.8%

Question

Quizplus · Accepted Answer

The expectations theory suggests that the forward rate can be calculated using the formula: (1 + 4-year rate)^4 / (1 + 3-year rate)^3 - 1. Plugging in the given rates: (1.058)^4 / (1.055)^3 - 1 = 6.7%.

According to the Expectations Theory, What Is the One-Year Forward