According to the expectations theory, what is the expected forward rate in the third year? The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. $\begin{array}{cc}
\text { Maturity }\
\text { (Years) } & \text { Price } \
1 & \$ 925.15 \
2 & 862.57 \
3 & 788.66 \
4 & 711.00
\end{array}$
A) 7.23%
B) 9.37%
C) 9.00%
D) 10.9%

Question

Quizplus · Accepted Answer

The expected forward rate in the third year can be calculated using the formula for forward rates: $(1 + y_3)^3 / (1 + y_2)^2 - 1$, where $y_3$ and $y_2$ are the yields for 3-year and 2-year bonds, respectively. Calculating these yields and applying the formula gives approximately 9.37%.