Assume That the Current Interest Rate on a 1-Year Bond

question 57

Multiple Choice

Assume that the current interest rate on a 1-year bond is 8 percent,the current rate on a 2-year bond is 10 percent,and the current rate on a 3-year bond is 12 percent.If the expectations theory of the term structure is correct,what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average. )

• A) 12.0%
• B) 16.0%
• C) 13.5%
• D) 10.5%
• E) 14.0%

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