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What must today four-year spot rate be

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Question 1: Suppose that in an economy, 1-year spot rate is currently at 6 percent. Due to economic slump, the 1-year spot rate one year from now will be 4 percent, the 1-year spot rate two years from now will be 3 percent; and the 1-year spot rate three years from now will be 2 percent. Under the unbiased expectations theory, what must today's four-year spot rate be? Suppose the four-year spot rate is actually 4.75 percent, how could you take advantage of this? Explain.

Reference no: EM132588785

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