Jeff Is Trying to Forecast What the Annual Interest Rate

question 32

Multiple Choice

Jeff is trying to forecast what the annual interest rate on a three-year bond will be two years from now,and he believes that the expectations hypothesis is the basis upon which he should build his forecast.Currently the rates of return on bonds of different maturities look like this: Maturity Rate
1-year 3.00%
2-year 3.50%
3-year 3.75%
4-year 4.00%
5-year 4.00%
Based on the expectations hypothesis,what forecast should Jeff make for the return on a three-year bond,two years in the future?

• A)4.0%
• B)4.25%
• C)4.33%
• D)13%

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Definitions:

Factual Information

Data or details that are true, objective, and can be verified or proven.

Accommodation

Adjusting one’s own behavior or thoughts to be more compatible with others or to deal effectively with new situations.

Little Importance

A term used to denote items, issues, or topics that are considered to have minimal significance or priority.

Avoidance

A strategy or behavior aimed at steering clear of certain situations, conflicts, or responsibilities due to perceived potential negative outcomes.