According to the Expectations Theory of the Term Structure, If

question 18

Multiple Choice

According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, what is the yield on a three-year bond today?

• A) 2.7%
• B) 4%
• C) 4.3%
• D) 8%

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Definitions:

Coupon

The interest rate on a bond, typically paid semiannually to the bondholders.

Yield To Maturity

An estimate of the annualized return an investor will receive from a bond, assuming it is held until its maturity date, inclusive of all payments.

Par Value

Par value is the face value of a bond or stock as stated by the issuing company, which may differ from its market value; for stocks, it is often a nominal amount.