A two-year bond is a perfect substitute for two consecutive one-year bonds.

Name: A two-year bond is a perfect substitute for two consecutive one-year bonds.
Brand: Quizplus
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Question

Quizplus · Accepted Answer

A two-year bond and two consecutive one-year bonds are not perfect substitutes because they have different interest rate risks and reinvestment risks. The interest rate for the second year of the one-year bonds is not known at the outset, introducing uncertainty that does not exist with a fixed two-year bond.

A Two-Year Bond Is a Perfect Substitute for Two Consecutive