Consider the Bond Market to Be in Equilibrium According to Our

question 42

Multiple Choice

Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates.The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent.Assume that there is no term premium on a one-year bond.Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year bond.The interest rate today on the two-year bond is

• A)3.25 percent.
• B)4.00 percent.
• C)4.75 percent.
• D)5.00 percent.

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