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If a One-Year Bond Currently Yields 4% and Is Expected

Question 1

Multiple Choice

If a one-year bond currently yields 4% and is expected to yield 6% next year, the liquidity premium theory suggests the yield today on a two-year bond will be:


A) More than 4% but less than 5%.
B) 5%.
C) 4%.
D) More than 5%.

Correct Answer:

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