Assume That the Current Interest Rate on a One-Year Bond

question 66

Multiple Choice

Assume that the current interest rate on a one-year bond is 8 percent, the current rate on a two-year bond is 10 percent, and the current rate on a three-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the one-year interest rate expected during Year 3? (Base your answer on an arithmetic average rather than a geometric average.)

• A)12%
• B)16%
• C)13%
• D)10%
• E)14%

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Definitions:

Albert Ellis

An American psychologist and psychotherapist who founded Rational Emotive Behavior Therapy (REBT), a form of cognitive-behavioral therapy focusing on identifying and changing irrational beliefs.

Unhappy

A state of dissatisfaction or sadness, often resulting from unmet expectations or adverse situations.

Automatic Thoughts

Refers to immediate, involuntary thoughts and assumptions that arise in response to specific situations.

Irrational Belief System

A psychological framework involving illogical or unrealistic beliefs that can lead to emotional and behavioral issues.