Assume the Current One-Year Interest Rate on a Bond Is

question 31

Multiple Choice

Assume the current one-year interest rate on a bond is 4%, and the one-year expected rate a year from now is 8%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

• A) 4%.
• B) 6%.
• C) 8%.
• D) 12%.

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Definitions:

Interest Earned

The profit gained from investing or saving, typically represented as a percentage of the original investment.

Compounded Quarterly

Interest calculation method where interest is added to the principal sum of a deposit or loan every quarter, influencing the amount in the next quarter.

Promissory Note

A monetary contract where one party commits to paying a distinct sum to another party, either on call or at a set date ahead.

Compounded Semi-Annually

Refers to the process where interest is added to the principal balance of an investment, loan, or deposit twice a year, leading to interest earning on interest previously accumulated.