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

Question

Quizplus · Accepted Answer

According to the expectations theory, the interest rate on a bond is determined by the average of expected future short-term interest rates. The one-year bond will have the lowest interest rate today because it only reflects the first year's expected rate of 2 percent, which is the lowest among the given expected rates.

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