Answer: greater than the 1-year risk-free rate.

For an investor expecting future spot rates to be below current forward rates, the expected return of a bond over a 1-year period will be **greater than the 1-year risk-free rate**. This occurs because: - Forward rates represent the break-even rates that would make investors indifferent between different investment strategies - If actual future spot rates are lower than forward rates, investors can earn excess returns by: - Buying longer-term bonds and selling them after 1 year - Reinvesting coupon payments at higher-than-expected rates - This creates a positive carry or roll-down return - The expected return exceeds the risk-free rate due to this yield advantage This is essentially the same logic as in question 15 - expecting lower future spot rates creates profitable opportunities.

Author: LeetQuiz Editorial Team