A recent edition of The Wall Street Journal reported interes

A recent edition of The Wall Street Journal reported interest rates of 6.2 percent, 6.55 percent, 6.85 percent, and 6.95 percent for three-year, four-year, five-year, and six-year Treasury notes, respectively. According to the unbiased expectations theory, what are the expected one-year rates for years 4, 5, and 6 (i.e., what are 4f1, 5f1, and 6f1)? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Solution

expected on year rates for years 4 = 1.0655^4/1.062^3 - 1 = 7.61%

expected on year rates for years 5 = 1.0685^5/1.0655^4 - 1 = 8.06%

expected on year rates for years 6 = 1.0695^6/1.0685^5 - 1 = 7.45%