Using the Pure Expectations Approach to the Determination of Interest

question 53

Multiple Choice

Using the pure expectations approach to the determination of interest rates,calculate the expected (E) rate of interest of a two-year investment that will be available in 12 months' time (₁i₃) ,given the following data:
Current rate of return on a one-year-to-maturity (₀i₁) instrument:7.75% per annum
Current rate of return on a two-year maturity (₀i₂) instrument:8.25% per annum
Current rate of return on a three-year maturity (₀i₃) instrument:8.65% per annum

• A) 8.35% per annum
• B) 9.10% per annum
• C) 9.56% per annum
• D) 19.03% per annum