For This Question, Assume That One- Year and Two- Year

question 11

Multiple Choice

For this question, assume that one- year and two- year bonds have the same risk; therefore, you can ignore risk here. Assume that there is arbitrage between one- year bonds and two- year bonds, we know that the expected rate of return on two- year bonds:

• A) will be exactly half the rate of return on one- year bonds.
• B) will equal the expected rate of return from holding a one- year bond for two years.
• C) will equal the expected rate of return from holding a one- year bond for one year.
• D) will be smaller than the expected rate of return from holding a one- year bond for one year.
• E) will be larger than the expected rate of return from holding a one- year bond for one year.

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