how can you take advantage of these rates to earn a riskless profit assume that the 637263

1. You observe the following market interest rates, for both borrowing and lending:

One year rate = 5%

Two year rate = 6%

One year rate one year from now = 7.25%

How can you take advantage of these rates to earn a riskless profit? Assume that the expectations theory for interest rates holds.

2. If the interest rates on one to five year bonds are currently 4%, 5%, 6%, 7%, and 8%, and the term premiums for one to five year bonds are 0%, 0.25%, 0.35%, 0.40%, and 0.50%, predict what the one year interest rate will be two years from now.