Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero. Which of the following statements is CORRECT?
A. The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.
B. The interest rate today on a 2-year bond should be approximately 6%.
C. The interest rate today on a 2-year bond should be approximately 7%.
D. The interest rate today on a 3-year bond should be approximately 7%.
E. The interest rate today on a 3-year bond should be approximately 8%.
Answer: D
You might also like to view...
If an audience may be antagonized by the main idea of a message, the deductive approach is preferred
Indicate whether the statement is true or false
Public officials prosecute criminal defendants
Indicate whether the statement is true or false
Which of the following is not an ethical breach?
A) Taking things that do not belong to you B) Giving or allowing false impressions C) Perpetrating interpersonal abuse D) All of the above are ethical breaches.
The risk that you will be forced to sell your bond back to the issuer prior to maturity is the
A) call (prepayment) risk. B) default risk. C) interest rate risk. D) political risk.