If I (T) and I (T) Are the Interest Rates

question 56

Multiple Choice

If i (t) and i (t) are the interest rates on a 2-year and 1-year bond issued this year and i (t + 1) 2 1 1
Is the 1-year rate next year, the equilibrium relationship between the 2-year bond and the two
1-year bonds is:

• A)i (t) = [i (t + 1) - i (t + 1)]12. 2 1 1
• B)i (t) = 2·[i (t) + i (t + 1)]. 2 1 1
• C)i (t) = (1/2)[i (t) + i (t + 1)].
• D)i (t) = i (t) + i (t + 1). 2 1 1

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