Suppose the Interest Rate on a 1-Year T-Bond Is 5

question 65

Multiple Choice

Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%.Assuming the pure expectations theory is correct,what is the market's forecast for 1-year rates 1 year from now?

• A)7.36%
• B)7.75%
• C)8.16%
• D)8.59%
• E)9.04%

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Definitions:

Jean-Baptiste Lamarck

An early 19th-century French biologist known for his theory of inheritance of acquired characteristics, a precursor to Darwin’s theory of evolution.

Spontaneously

Occurring without apparent external cause or intervention, often used to describe natural phenomena or processes.

Organisms Adapt

The process by which living things change over time in response to their environment to improve their chances of survival.

George Lyell

This appears to be a mistaken reference. If it intends to refer to Charles Lyell, he was a British lawyer and the foremost geologist of his day, best known for his contributions to the principles of geology and the concept of deep time.