Suppose That the Current One-Year Treasury-Bill Rate Is 3

question 3

Multiple Choice

Suppose that the current one-year Treasury-bill rate is 3.15 percent and the expected one-year rate 12 months from now is 4.25 percent. According to the unbiased expectations theory,what should be the current rate for a two-year Treasury security?

• A)3.70 percent
• B)4.15 percent
• C)2.36 percent
• D)4.74 percent
• E)5.50 percent

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Definitions:

Working Diligently

Refers to the act of putting consistent and earnest effort into one's tasks or duties.

Moral Hazard

A scenario in which an entity is prone to engage in risky behaviors knowing that another party will shoulder the consequences of such risks.

Adverse Selection

Adverse selection also pertains to the tendency of those in dangerous jobs or high-risk lifestyles to acquire life or health insurance to a greater extent than those with lower-risk profiles, thereby distorting the market.

Unobservable Actions

Actions taken by individuals or entities that cannot be seen or measured directly, often relevant in contexts of performance evaluation or trust.