Using the Pure Expectations Approach to the Determination of Interest

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

Correct Answer:

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