According to the Expectations Theory of the Term Structure of Interest

question 12

Multiple Choice

According to the expectations theory of the term structure of interest rates, if the interest rate on a one-year bond today is 3.0 percent, the expected interest rate on a one-year bond one year from now is 4.0 percent, and the expected interest rate on a one-year bond two years from now is 4.5 percent, then the interest rate on a two-year bond today is

• A)3.00 percent.
• B)3.50 percent.
• C)3.83 percent.
• D)4.00 percent.

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Definitions:

Compounded Semi-annually

The process where interest is added to the principal of an investment or loan twice a year, resulting in interest earning interest.

RRSP

Registered Retirement Savings Plan, a Canadian investment account for holding savings and investment assets, aimed at retirement planning.

Month-end Contributions

Payments or deposits made into a particular account or for a specific purpose at the end of a month.

Future Value

The amount of money an investment is expected to be worth in the future, taking into account interest or gains.