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Question: the current spot rates annualized for maturities expressed in months...

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The current spot rates (annualized) for maturities expressed in months are: 

0i1=3.5%, 0i2=4%, 0i6=5%, 0i10=6% and 0i12=6.5%.

 

The first subscript refers to the starting date of the investment while the second subscript refers to the term/maturity of the investment. [Note that the second subscript is NOT a date but a length.]

 

Assuming that the expectations theory of interest rates holds, derive the market expectations 2ieimplicit in the above term structure. Answer the question assuming monthly compounding.

Explain all the steps of your argumentation and show all the details of your calculations. 

 

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