Assume That the Expectations Theory Holds and That Liquidity and Maturity

Multiple Choice

Assume that the expectations theory holds and that liquidity and maturity risk premiums are zero. The annual rate of interest on a two-year Treasury bond is 10.5 percent and the rate on a one-year Treasury bond is 12 percent. What is the expected one-year interest rate during the second year?

A) 9.0%
B) 9.5%
C) 10.0%
D) 10.5%
E) 11.0%