Assume That the Expectations Theory of Term Structure Holds

question 27

Multiple Choice

Assume that the expectations theory of term structure holds.If the rate on a two-year Treasury bond is 8% and the rate on a three-year Treasury bond is 7%,what is the expected rate on a one-year Treasury bond in year three?

• A) 8%
• B) 7%
• C) 6%
• D) 5%
• E) 4%

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Definitions:

Bond Payable

A long-term liability account that records the amounts owed to bondholders by the issuer.

Straight-Line Method

A technique for determining depreciation or amortization that involves uniformly distributing the cost of an asset throughout its lifespan.

Contract Rate

A contract rate is a pre-agreed price or fee set in a contract for services or goods, which remains fixed for the duration of the agreement.

Market Rate

The prevailing price or interest rate at which goods, services, or securities are traded in the open market.