If the Expected Path of Interest Rates on One-Year Bonds

question 55

Multiple Choice

If the expected path of interest rates on one-year bonds over the next five years is 2%, 4%, 3%, 2%, and 1%, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of

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

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Definitions:

Consumption

The action of using goods and services to fulfill needs or desires; usually the largest component of GDP.

Saving

The portion of income not spent on current expenditures or consumables, often put aside for future use or investments.

Opportunity Cost

The penalty of bypassing the alternative that ranks second in preference while making a choice.

Investment

The process of distributing funds with the aim of earning returns or profits.