Assume That the Expectations Theory Holds,and That Liquidity and Maturity

question 45

Multiple Choice

Assume that the expectations theory holds,and that liquidity and maturity risk premiums are zero.If the annual rate of interest on a 2-year Treasury bond is 10.5 percent and the rate on a 1-year Treasury bond is 12 percent,what rate of interest should you expect on a 1-year Treasury bond one year from now?

• A) 9.0%
• B) 9.5%
• C) 10.0%
• D) 10.5%
• E) 11.0%

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