Assume the current one-year interest rate on a bond is 2%, and the one-year expected rate a year from now is 3%. According to the expectations theory of the term structure of interest rates, the two-year interest rate is

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According to the expectations theory, the long-term interest rates equal the average of the short-term interest rates expected over the term of the long-term bond. 
Therefore, the expected one-year interest rate in two years will be the average of the current 2% and the one-year expected rate a year from now, which is 3%. 
That is, (2% + 3%) / 2 = 2.5%. So the two-year interest rate is 2.5%.

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