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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