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The One-Year Spot Rate Is Currently 4 Percent; the One-Year

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Essay

The one-year spot rate is currently 4 percent; the one-year spot rate one year from now will be 3 percent; and the one-year spot rate two years from now will be 6 percent. Under the unbiased expectations theory,what must today's three-year spot rate be? Suppose the three-year spot rate is actually 3.75 percent,how could you take advantage of this? Explain.


Definitions:

Transmittal

The process or document involved in sending something from one person or place to another.

FICA-OASDI

Federal Insurance Contributions Act - Old Age, Survivors, and Disability Insurance, a U.S. payroll tax funding Social Security.

FUTA

Stands for Federal Unemployment Tax Act, which imposes a payroll tax on employers to help fund state workforce agencies.

SUTA

State Unemployment Tax Act; a type of payroll tax that employers must pay to the state government to fund unemployment benefits.

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