PPT Slide
From the spot rates S1,…., Sn for the next n years, we can deduce a set of forward rates f1,2 ,.., f1,n. According to the expectations theory, these forward rates define the expected spot rate curves for the next year.
For example, suppose S1 = 7%, S2 = 8%, then
Then this value of 9.01% is the market’s expected value of next year’s one-year spot rate .