The Current Market Interest Rate for One Year Maturity Bond

question 53

Multiple Choice

The current market interest rate for one year maturity bond is 10%.The forward rate for a one year investment starting in one year from now is 8%.According to the expectations theory of term structure,the current two-year maturity market interest rate is:

• A)smaller than 8%.
• B)larger than 10%
• C)between 8% and 10%.
• D)8%.

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Definitions:

Foreign Currency Option

A financial derivative that gives the holder the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.

Fair Value

The cost at which one could sell an asset or assume a liability in a structured exchange with market participants on the valuation date.