According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, which yield is the closest to the yield on a three-year bond today?
A) 2.7%
B) 4%
C) 4.3%
D) 8%

Question

Quizplus · Accepted Answer

The Expectations Theory suggests that the yield on a three-year bond today would be the average of the expected interest rates over the next three years. Therefore, (2% + 2% + 4%) / 3 = 2.67%, which is closest to 2.7%.

According to the Expectations Theory of the Term Structure, If