Assume That the Expectations Theory Holds,and That Liquidity and Maturity

question 45

Multiple Choice

Assume that the expectations theory holds,and that liquidity and maturity risk premiums are zero.If the annual rate of interest on a 2-year Treasury bond is 10.5 percent and the rate on a 1-year Treasury bond is 12 percent,what rate of interest should you expect on a 1-year Treasury bond one year from now?

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

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Definitions:

Marginal Returns

The additional output or benefit received from producing one more unit of a good or service.

Marginal Cost

The cost added by producing one additional unit of a product or service, a crucial concept for making economic decisions.

Average Total Cost

The total cost divided by the quantity produced, indicative of the cost per unit of output.

Average Fixed Cost

Fixed cost divided by output.