Assume That the Expectations Theory of Term Structure Holds

question 27

Multiple Choice

Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%,what is the expected rate on a one-year Treasury bond in year three?

• A) 8%
• B) 7%
• C) 6%
• D) 5%
• E) 4%

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Definitions:

Cash Conversion Cycle

The time it takes for a company to convert its investments in inventory into cash flows from sales.

Inventory System

An inventory system is a mechanism for tracking the sale, purchase, and storage of goods, facilitating efficient management and control of inventory.

DSO

Days Sales Outstanding, a financial metric that calculates the average number of days it takes a company to collect payment after a sale has been made.

Compensating Balances

Minimum cash balances that a borrower agrees to maintain in a demand deposit account as a condition for a loan.