The Yield on a One-Year Treasury Bond Is 5 Percent

Multiple Choice

The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury bond is 6 percent. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

A) The maturity risk premium is negative.
B) Interest rates are expected to fall over the next two years by 3 percent.
C) The market expects one-year interest rate during the second year to be 7 percent.
D) The default risk premium is highest for Year 2.
E) The liquidity risk premium is highest for Year 1.