Looking in today’s newspaper, you observe the following yield curve information:
MATURITY YIELD
1 year 1.0%
2 years 1.8
3 years 3.0
4 years 4.2
5 years 5.5
a/ If the pure expectations hypothesis holds, what is the three-year forward rate two years from now?
b/ Is the forward rate you derived consistent with the pure expectation hypothesis? Why?
Please answer both (a) and (b) and show your calculation steps