According to expectations theory if the 1 year interest is 3% this year and expected to be 5% next year, the 2 year interest rate should be approximately

Question

Quizplus · Accepted Answer

According to expectations theory, the long-term interest rate is equal to the average of the short-term interest rates expected over the same period. In this case, the average of the 1-year interest rates expected for the next two years is (3%+5%)/2 = 4%. Therefore, the 2-year interest rate should be approximately 4%. Choice C is the only one that is close to this calculated value.

According to Expectations Theory If the 1 Year Interest Is