Suppose That a Bond That Will Mature in Two Years

Multiple Choice

Suppose that a bond that will mature in two years has a face value of $1000 and 20% coupon rate. The one year spot market interest rate is 13% and the expected second period's forward rate is 12%. According to the expectation hypothesis, the two year spot rate is:

A) 11.50%.
B) 9.12%.
C) 12.74%.
D) 7.00%.