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

question 57

Multiple Choice

Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 6.80%.Assume that the pure expectations theory is NOT valid,and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond.What is the yield on a 1-year T-bond expected to be one year from now? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.

• A) 7.43
• B) 8.52
• C) 6.57
• D) 7.82
• E) 5.86

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