According to the Expectations Theory of the Term Structure of Interest,if

question 28

Multiple Choice

According to the expectations theory of the term structure of interest,if the 1-year bond rate today is 6% p.a.and the 3-year bond rate today is 7.5% p.a. ,what is the 2-year bond rate next year?

• A)7.25%
• B)7.75%
• C)8.25%
• D)8.75%

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Definitions:

Default Risk

The risk of loss to a lender from the borrower’s failure to pay the full amount due including interest and principal.

Commercial Paper

An unsecured, short-term debt instrument issued by corporations, typically used for the financing of accounts receivable, inventories, and meeting short-term liabilities.

Bank Loan

A sum of money lent by a bank to a borrower at an interest rate, which is to be repaid with interest according to the terms of the loan agreement.

Interest Rate

The percent of principal charged by the lender for the use of its money.