Suppose the current one-year interest rate is 3%,and financial markets expect the one-year interest rate next year to be 5%.Given this information,the yield to maturity on a two-year bond will be approximately
A)4%.
B)6%.
C)8%.
D)12%.
E) none of the above

Question

Quizplus · Accepted Answer

The yield to maturity on a two-year bond, given the current one-year interest rate of 3% and the expected one-year interest rate next year of 5%, can be approximated by averaging these two rates. This gives (3% + 5%) / 2 = 4%. This approximation assumes a linear relationship and does not account for compounding, but it provides a simple estimate.

Suppose the Current One-Year Interest Rate Is 3%,and Financial Markets