Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates.The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent.Assume that there is no term premium on a one-year bond.Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year bond.The interest rate today on the two-year bond is
A)3.25 percent.
B)4.00 percent.
C)4.75 percent.
D)5.00 percent.

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The Answer of Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates.The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent.Assume that there is no term premium on a one-year bond.Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year bond.The interest rate today on the two-year bond is
A)3.25 percent.
B)4.00 percent.
C)4.75 percent.
D)5.00 percent.

Consider the Bond Market to Be in Equilibrium According to Our