For this question,assume that one-year and two-year bonds have the same risk; therefore,you can ignore risk here.Assuming that there is arbitrage between one-year bonds and two-year bonds,we know that the expected rate of return on two-year bonds

Question

Quizplus · Accepted Answer

In an arbitrage-free market, the expected rate of return on two-year bonds should equal the expected rate of return from holding a one-year bond for one year, assuming risk is the same and ignoring any other factors. This is because if the returns were different, investors would buy the bond with the higher return and sell the bond with the lower return, leading to an arbitrage opportunity until the returns equalize.

For This Question,assume That One-Year and Two-Year Bonds Have the Same