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%
Answer: A
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