Assuming the pure expectations theory is correct, which of the following statements is CORRECT?
A. If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise.
B. If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%.
C. If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year.
D. Reinvestment rate risk is higher on long-term bonds, and interest rate (price) risk is higher on short-term bonds.
E. Interest rate (price) risk and reinvestment rate risk are relevant to investors in corporate bonds, but these concepts do not apply to Treasury bonds.
Answer: A
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