Assume That the Expectations Theory Holds and That Liquidity and Maturity

question 31

Multiple Choice

Assume that the expectations theory holds and that liquidity and maturity risk premiums are zero. The annual rate of interest on a two-year Treasury bond is 10.5 percent and the rate on a one-year Treasury bond is 12 percent. What is the expected one-year interest rate during the second year?

• A)9.0%
• B)9.5%
• C)10.0%
• D)10.5%
• E)11.0%

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Definitions:

Dual Process Model

A theory suggesting there are two distinct systems for processing information: a fast, automatic, intuitive system, and a slower, more analytical, reflective system.

Prefrontal Cortex

The prefrontal cortex is a region of the brain associated with executive functions like decision-making, personality expression, and managing social behavior.

Limbic System

A complex system of nerves and networks in the brain, involving several areas near the edge of the cortex concerned with instinct and mood, regulating emotions, memory, and arousal.

Neurotransmitter

Chemical substances in the nervous system that transmit signals from one neuron to another.