Multiple Choice
Assume that the current interest rate on a one-year bond is 8 percent, the current rate on a two-year bond is 10 percent, and the current rate on a three-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the one-year interest rate expected during Year 3? (Base your answer on an arithmetic average rather than a geometric average.)
A) 12%
B) 16%
C) 13%
D) 10%
E) 14%
Correct Answer:
Verified
Correct Answer:
Verified
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