If the expected path of 1-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of
A)two years.
B)three years.
C)four years.
D)five years.

Question

Quizplus · Accepted Answer

According to the expectations theory, the bond with the highest interest rate will be the one with the longest maturity, as it compensates investors for locking in their money for a longer period of time. Therefore, the bond with a maturity of five years will have the highest interest rate in this scenario.

If the Expected Path of 1-Year Interest Rates Over the Next