Assume That the Current Interest Rate on a 1-Year Bond

question 57

Multiple Choice

Assume that the current interest rate on a 1-year bond is 8 percent,the current rate on a 2-year bond is 10 percent,and the current rate on a 3-year bond is 12 percent.If the expectations theory of the term structure is correct,what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average. )

• A) 12.0%
• B) 16.0%
• C) 13.5%
• D) 10.5%
• E) 14.0%

---

Definitions:

Silurian Period

A geologic time period that occurred roughly 443.8 to 419.2 million years ago, characterized by significant biological diversity and the early development of terrestrial ecosystems.

Ediacaran Period

The last (most recent) period of the Proterozoic eon, from 635 million to 541 million years ago; named for early animal fossils found in the Ediacara Hills in South Australia.

Gymnosperms

A group of seed-producing plants that include conifers and cycads, characterized by having seeds that are not enclosed in an ovary (fruit).

Large Dinosaurs

Large dinosaurs were prehistoric reptiles, including species like the Tyrannosaurus rex and Brachiosaurus, known for their massive size and diversity during the Mesozoic era.