Assume the interest rate on a current one-year bond is 3%,and the expected interest rate on the one-year bond one year from now is 6%.If the term premium on a two-year bond is 0.5%,then the interest rate on the two-year bond will be

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The interest rate on the two-year bond is calculated by averaging the current one-year bond rate (3%) and the expected one-year bond rate one year from now (6%), then adding the term premium (0.5%): (3% + 6%)/2 + 0.5% = 5%.

Assume the Interest Rate on a Current One-Year Bond Is