Assume the following data:
Current interest rate for a one year security is 2.5%
Actual inflation last year (2006) was 5%
Nominal GDP growth is 2% for both years
Current interest rate for a two year security is 4%
Current interest rate for a three year security is 5%
What is the expected (i.e. forward) interest rate for a security with a one year maturity one year from now?
State the formula and show your work.