If the Expected Path of One-Year Interest Rates Over the Next

question 90

Multiple Choice

If the expected path of one-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

• A) one year.
• B) two years.
• C) three years.
• D) four years.
• E) five years.

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Definitions:

Unamortized Discount

The portion of a bond discount that has not yet been amortized (expensed) over the life of the bond.

Carrying Amount

The value at which an asset is recognized on the balance sheet after deducting accumulated depreciation or amortization.

Premium On Bonds

The amount by which the price paid for a bond exceeds its face value, often due to interest rates being lower than the bond's coupon rate.

Effective Interest Rate

The actual rate of interest earned or paid on an investment, loan, or other financial product, taking into account the effects of compounding.