Final answer:
The expected one-year interest rate for next year, based on the current one-year rate of 1.2% and the two-year rate of 1.4%, can be calculated as approximately 1.6% using the interest rate expectations theory.
Step-by-step explanation:
The calculation of the expected one-year interest rate for next year requires an understanding of interest rate expectations theory which suggests that long-term interest rates reflect expected future short-term rates. If we are given the current one-year interest rate of 1.2% and the two-year interest rate of 1.4%, we can use these to determine the expected one-year interest rate in the second year. This is done by ensuring that the total return from investing for two successive one-year periods at the current one-year rate and the expected one-year rate would be equivalent to investing once for two years at the given two-year rate.
To do this, we assume we invest an amount (let's call it 100 monetary units for simplicity) at the current one-year rate of 1.2%, which means at the end of the first year we would have 100 * (1 + 0.012) monetary units. Then, we would reinvest the entire amount at the expected one-year rate for the second year. Alternatively, we could invest the 100 monetary units at the two-year rate of 1.4% to get 100 * (1 + 0.014)^2 after two years.