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%.

---

Definitions:

Residual Income

The income that exceeds the minimum rate of return, often used as a measure of the performance of investment centers within organizations.

Net Operating Income

Profit generated from a company's normal business operations, excluding deductions of interest and taxes.

Minimum Rate Of Return

The least expected rate of return on an investment necessary for it to be considered a viable option.

Return On Investment

A performance measure used to evaluate the efficiency of an investment or compare different investments.