Assume the current price investors are willing to pay on a $1000 face value one-year Canada Savings Bond is $980.39,and investors expect that they will be willing to pay $961.54 on a $1000 face value one-year Canada Savings Bond one year from now.According to the expectations hypothesis,the current interest rate (per year)on a $1000 face value two-year Canada Savings Bond should be

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The expectations hypothesis states that the current interest rate on a two-year bond is equal to the average of the current one-year interest rate and the expected one-year interest rate one year from now. The current one-year interest rate is the yield to maturity on a one-year bond, which is calculated as follows:$$YTM = \frac{FV - PV}{PV * N}$$where:* YTM is the yield to maturity* FV is the face value of the bond* PV is the present value of the bond* N is the number of years to maturityIn this case, the face value of the bond is $1000, the present value is $980.39, and the number of years to maturity is 1. Therefore, the yield to maturity is:$$YTM = \frac{1000 - 980.39}{980.39 * 1} = 0.02$$or 2%.The expected one-year interest rate one year from now is the yield to maturity on a one-year bond one year from now. This is given as $961.54. Therefore, the expected one-year interest rate one year from now is:$$YTM = \frac{1000 - 961.54}{961.54 * 1} = 0.04$$or 4%.Therefore, the current interest rate on a two-year bond is:$$YTM = \frac{0.02 + 0.04}{2} = 0.03$$or 3%.

Assume the Current Price Investors Are Willing to Pay on a $1000