A One-Year Bond Currently Pays 5% Interest

question 59

Multiple Choice

A one-year bond currently pays 5% interest.It's expected that it will pay 4.5% next year and 4% the following year.The two-year term premium is 0.2% while the three-year term premium is 0.35%.What is the interest rate on a two-year bond according to the liquidity premium theory?

• A) 4.5%
• B) 4.75%
• C) 4.95%
• D) 4.975%

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