Suppose the current one-year interest rate is 4%.Also assume that financial markets expect the one-year interest rate next year to be 5%,and expect the one-year rate to be 6% the year after that.Given this information,the yield to maturity on a three-year bond will be approximately
A)4%.
B)5%.
C)6%.
D)15%.

Question

Quizplus · Accepted Answer

The yield to maturity on a three-year bond can be approximated by taking the average of the expected one-year interest rates over the three-year period, which would be (4%+5%+6%)/3 = 5%. Therefore, the best choice is B.

Suppose the Current One-Year Interest Rate Is 4