If a bank is asked to quote a rate on a one-year loan one year from today and the current interest rate on a one-year loan is 7 percent and a two-year loan is 8 percent, it should quote 7.5 percent, which is the average of the two rates.

Question

Quizplus · Accepted Answer

The bank should quote a rate based on the expectations of future interest rates, not just the average of current rates. If the bank expects interest rates to increase in the next year, it may quote a higher rate than 7.5%. If it expects rates to decrease, it may quote a lower rate.

If a Bank Is Asked to Quote a Rate on a One-Year