Answer:
The expected 1-year interest rate 2 years from now should be 8.11%
Explanation:
The Zero-coupon rate bond is a bond that does not offer the coupon payment. This coupon is issued at a deep discount value. The only cash flow associated with this bond is the face value at the maturity date.
Use following equation to calculate the The expected 1-year interest rate 2 years from now
( 1 + 1 years maturity rate)^1 x ( 1 + 2 years maturity rate)^2 = ( 1 + 3 years maturity rate)^3
( 1 + 1 years maturity rate) x ( 1 + 6.60%)^2 = ( 1 + 7.10%)^3
( 1 + 1 years maturity rate) x ( 1.0660)^2 = ( 1.0710)^3
( 1 + 1 years maturity rate) = ( 1.0710)^3 / ( 1.0660)^2
( 1 + 1 years maturity rate) = 1.228481 / 1.136356
1 + 1 years maturity rate = 1.081071
1 years maturity rate = 1.081071 - 1
1 years maturity rate = 0.081071
1 years maturity rate = 8.1071%
1 years maturity rate = 8.11%
