Analysts At Irish Setter Securities Have Reported That The Annual Interest Rate

Analysts at Irish Setter Securities have reported that the annual interest rate being paid on 3-year bonds issued by the U.S. federal government is 4.2%. The annual rate being paid on 2-year federal government bonds is 3.9%, and the rate being paid on 1-year federal government bonds is 3.7%. Assume also that liquidity and maturity risk premiums are zero. According to the Expectations Theory, what annual interest rate does the market expect the federal government to pay on a 1-year bond originating in year 2?

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