Tax Status and Expectations Theory.
1. Assume that as of today the one-year annualized rate of a security is 4.0%, the two-year rate is 6.0%, and the three-year rate is 7.0%. Find the estimate of t+2r1, a one-year forward rate two years from now. Hint: Find t+1r1, the one-year forward rate one year from now first. Check figure for one-year forward rate one year from now: t+1r1 = 0.0804
2. Using the information provided in question 3, estimate t+1r2, the two-year forward rate one year from now. Check figure: t+1r2 = 0.0853 is the two-year forward rate.