If a One-Year Bond Currently Yields 4% and Is Expected

question 69

Multiple Choice

If a one-year bond currently yields 4% and is expected to yield 6% next year, the Liquidity Premium Theory suggests the yield today on a two-year bond will be:

• A)More than 4% but less than 5%.
• B)5%.
• C)4%.
• D)More than 5%.

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Definitions:

Earthquake

An abrupt and intense quivering of the earth's surface, frequently resulting from shifts in the Earth's crust or activity from volcanoes.

Oceanic Trench

A deep, elongated depression in the ocean floor caused by the subduction of one tectonic plate under another.

P-Waves

Primary waves, which are compressional waves that travel through the Earth's interior during seismic events.

Velocity

A physical vector quantity that denotes the rate of change of position of an object, with both magnitude and direction.