If a One-Year Bond Currently Yields 4% and Is Expected

question 1

Multiple Choice

If a one-year bond currently yields 4% and is expected to yield 6% next year, the liquidity premium theory suggests the yield today on a two-year bond will be:

• A) More than 4% but less than 5%.
• B) 5%.
• C) 4%.
• D) More than 5%.

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Definitions:

Historical Data

Collected data from past events and trends used to analyze and predict future outcomes or behaviors.

Business Cycle

The fluctuations in economic activity that an economy experiences over a period of time, characterized by periods of expansion and recession.

Inflation Rates

The rate at which the general level of prices for goods and services is rising, indicating the purchasing power of currency is falling.

Mean Absolute Deviation

A statistical measure of the average absolute deviations from a dataset's mean, indicating variability within the data.