The image presents a financial problem asking to calculate the expected 2-year spot interest rate one year from today, based on the following:

• Current 1-year spot rate: 5.5%
• Current 3-year spot rate: 6.75%

This type of problem is typically solved using the expectations theory of interest rates. To estimate the 2-year spot rate one year from today, we use the relationship between the current spot rates and forward rates.

The formula to calculate the implied forward rate (f₁,₂) between years 1 and 2, using spot rates, is:

$(1 + r_3)^3 = (1 + r_1) \cdot (1 + f_{1,2})^2$

Where:

• $r_3 = 6.75\%$ is the 3-year spot rate.
• $r_1 = 5.5\%$ is the 1-year spot rate.
• $f_{1,2}$ is the 2-year forward rate one year from now.

Let's solve for $f_{1,2}$. I'll calculate this for you.The expected 2-year spot interest rate one year from today is approximately 7.38%.

Would you like further clarification on how this was calculated or additional details on this topic?

Here are 5 related questions that might help you deepen your understanding:

1. What is the expectations theory of interest rates?
2. How does the forward rate relate to future interest rate expectations?
3. Can we use other methods to estimate future interest rates aside from the expectations theory?
4. What is the difference between spot rates and forward rates?
5. How do changing interest rates affect bond prices?

Tip: Understanding how spot rates and forward rates work together is crucial for interpreting yield curves, especially when predicting future interest rates.