Assume the Current One-Year Interest Rate on a Bond Is

question 54

Multiple Choice

Assume the current one-year interest rate on a bond is 2%, and the one-year expected rate a year from now is 3%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

• A) 2%.
• B) 2.5%.
• C) 3%.
• D) 5%.