If 1-year interest rates for the next three years are expected to be 1,1,and 1 percent,and the 3-year term premium is 1 percent,than the 3-year bond rate will be
A)1 percent.
B)2 percent.
C)3 percent.
D)4 percent.

Question

Quizplus · Accepted Answer

The 3-year bond rate can be calculated as the average of the expected 1-year interest rates plus the term premium. So, (1+1+1)/3 + 1 = 2 percent. Therefore, the answer is B.

If 1-Year Interest Rates for the Next Three Years Are