Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)?
A. ?12.0%
B. ?16.0%
C. ?13.5%
D. ?10.5%
E. ?14.0%
Answer: B
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