If a One-Year Bond Currently Yields 5% and Is Expected

question 52

Multiple Choice

If a one-year bond currently yields 5% and is expected to yield 7% next year, the preferred habitat theory predicts that the yield today on a two-year bond will be

• A)5%.
• B)less than 6%, but more than 5%.
• C)6%.
• D)more than 6%.

---

Definitions:

Flexible Budget Cost Variance

The difference between actual costs and the costs allocated in the flexible budget, which adjusts based on actual levels of activity.

Quantity Variance

A variance that is computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input.

Price Variance

The difference between the actual cost of a good or service and its budgeted or standard cost.

Standard Cost System

A cost accounting system that uses standard costs for products or services to compare against actual costs and analyze variances for management control.