ou are given the following information:
Current interest rate on a 1 year T-bond (1R1) = 2.0%
Current interest rate on a 2 year T-bond (1R2) = 3.5%
Current interest rate on a 3 year T-bond (1R3) = 5.5%
Current interest rate on a 4 year T-bond (1R3) = 6.2%
Required liquidity risk premia for a:
1-year bond (l1) = 0%
2-year bond (l2) = 0.10%
3-year bond (l3) = 0.30%
4-year bond (l3) = 0.40%
Under the Liquidity Premium Theory of the term structure of interest rates, what is the expected 3-year forward rate at the beginning of year 2 (2f3)? (Use geometric average.)
Please show all work to get credit and explain how you got there. I'm genuinely confused on how to do this problem.