Assume the one-year interest rate on a bond is 8% and the expected one-year rate a year from now is 12%. According to the expectations theory of the term structure of interest rates, the two-year rate will be

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According to the expectations theory, the two-year interest rate can be calculated as the average of the one-year rate and the expected one-year rate next year. Therefore, (8% + 12%) / 2 = 10%.

Assume the One-Year Interest Rate on a Bond Is 8