For This Question,assume That One-Year and Two-Year Bonds Have the Same

question 40

Multiple Choice

For this question,assume that one-year and two-year bonds have the same risk; therefore,you can ignore risk here.Assuming that there is arbitrage between one-year bonds and two-year bonds,we know that the expected rate of return on two-year bonds

• A)will equal the expected rate of return from holding a one-year bond for one year.
• B)will equal the expected rate of return from holding a one-year bond for two years.
• C)will be larger than the expected rate of return from holding a one-year bond for one year.
• D)will be smaller than the expected rate of return from holding a one-year bond for one year.
• E) will be exactly half the rate of return on one-year bonds.

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