Assume That the Bond Market Is in Equilibrium

question 31

Multiple Choice

Assume that the bond market is in equilibrium.The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent.Assume that there is no term premium on a one-year bond.If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds.The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .

• A)5.5 percent; 5.8 percent
• B)6.0 percent; 6.3 percent
• C)6.2 percent; 6.8 percent
• D)6.5 percent; 7.3 percent

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Definitions:

Silicon Chip

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A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.

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