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A One-Year Bond Currently Pays 5% Interest

Question 37

Multiple Choice

A one-year bond currently pays 5% interest. It's expected that it will pay 4.5% next year and 4% the following year. The two-year term premium is 0.2% while the three-year term premium is 0.35%. What is the interest rate on a three-year bond according to the preferred habitat theory?


A) 4.5%
B) 4.68%
C) 4.85%
D) 5.05%

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