1) Assume that the Pure Expectation Theory determines interest rates in the markets. Today's market rates for different maturities follow an interesting pattern. The spot rate for investing for 1 year is 5%. After that, the rate increases by 1% for each year. So, in general, the rate for year Y is simply 5% + 1%*(Y-1).
Given this information, what is the implied interest rate to invest for 1 year, starting in 2 years?
2) Assume that the Pure Expectation Theory determines interest rates in the markets. Today's market rates for different maturities follow an interesting pattern. The spot rate for investing for 1 year is 4%. After that, the rate increases by 1% for each year. So, in general, the rate for year Y is simply 4% + 1%*(Y-1).
Given this information, what is the implied interest rate to invest for 1 year, starting in 3 years?