Jeff is trying to forecast what the annual interest rate on a three-year bond will be two years from now, and he believes that the expectations hypothesis is the basis upon which he should build his forecast. Currently the rates of return on bonds of different maturities look like this:
Maturity Rate
1-year 3.00%
2-year 3.50%
3-year 3.75%
4-year 4.00%
5-year 4.00%
Based on the expectations hypothesis, what forecast should Jeff make for the return on a three-year bond, two years in the future?