Assume That the Bond Market Is in Equilibrium

Multiple Choice

Assume that the bond market is in equilibrium.The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent.Assume that there is no term premium on a one-year bond.If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds.The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .

A) 5.5 percent; 5.8 percent
B) 6.0 percent; 6.3 percent
C) 6.2 percent; 6.8 percent
D) 6.5 percent; 7.3 percent