Suppose We Observe the Following Rates: ₁R₁ = 6 Percent

question 20

Multiple Choice

Suppose we observe the following rates: ₁R₁ = 6 percent, ₁R₂ = 7.5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁) ?

• A) 6.75 percent
• B) 7.50 percent
• C) 9.02 percent
• D) 13.5 percent

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Definitions:

Standard Normal Distribution

A normal distribution with a mean of zero and a standard deviation of one, used as a reference in statistical analysis.

Confidence Interval

A continuum of figures obtained from a sample's statistics, likely to envelop the value of an unknown population characteristic.

Population Proportion

The fraction of individuals in a population having a particular attribute, representing a particular kind of population parameter.

Confidence Interval

A range of values, derived from sample statistics, that is likely to contain the true value of an unknown population parameter with a specified level of confidence.