Suppose the term structure of interest rates has these spot interest rates: r1 = 6.9%. r2...

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Suppose the term structure of interest rates has these spotinterest rates: r1 = 6.9%. r2 = 6.7%, r3 = 6.5%, and r4 = 6.3%. a.What will be the 1-year spot interest rate in three years if theexpectations theory of term structure is correct? (Do not roundintermediate calculations. Enter your answer as a percent roundedto 1 decimal place.) 1-year spot in 3 years % b. If investing inlong-term bonds carries additional risks, then how would the riskequivalent of a 1-year spot rate in three years relate to youranswer to part (a)?

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Part a Invest say 100 in a three year instrument Maturity amount after three years A3 100 x 1 r33 100 x 1 653 12079 Invest 100 in a four year instrument See Answer

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Suppose the term structure of interest rates has these spotinterest rates: r1 = 6.9%. r2 = 6.7%, r3 = 6.5%, and r4 = 6.3%. a.What will be the 1-year spot interest rate in three years if theexpectations theory of term structure is correct? (Do not roundintermediate calculations. Enter your answer as a percent roundedto 1 decimal place.) 1-year spot in 3 years % b. If investing inlong-term bonds carries additional risks, then how would the riskequivalent of a 1-year spot rate in three years relate to youranswer to part (a)?