Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 10.5 percent and the rate on a 1-year Treasury bond is 12 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now??
A. ?9.0%
B. ?9.5%
C. 10.0%?
D. ?10.5%
E. ?11.0%
Answer: A
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