Suppose That a Bond That Will Mature in Two Years

question 61

Multiple Choice

Suppose that a bond that will mature in two years has a face value of $1000 and 20% coupon rate. The one year spot market interest rate is 13% and the expected second period's forward rate is 12%. According to the expectation hypothesis, the two year spot rate is:

• A) 11%
• B) 9%
• C) 12.49%
• D) 7%

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