Suppose we observe the following rates: 1R1 = 6.2%, 1R2 = 7.2%. If the unbiased expectations theory of the term structure of interest rates holds,

Suppose we observe the following rates: 1R1 = 6.2%, 1R2 = 7.2%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places. (e.g., 32.16))

Answer

(1+1R2)^2 = (1+1R1) * (1+E(2r1))

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=>

(1+0.072)^2 = (1+ 0.062) * (1+E(2r1))

=>

E(2r1) = 8.21%