Suppose the current one- year interest rate is 8%, and financial markets expect the one- year interest rate next year to be 14%. Given this information, the yield to maturity on a two- year bond will be approximately:
A) 5%.
B) 3%.
C) 6%.
D) 11%.
E) 15%.

Question

Quizplus · Accepted Answer

The yield to maturity on a two-year bond, given the expectations theory, is the average of the current one-year interest rate and the expected one-year interest rate next year. Thus, (8% + 14%) / 2 = 11%.

Suppose the Current One- Year Interest Rate Is 8%, and Financial