If the interest rate on a 2-year security was higher than the average expected interest rate on consecutive 1-year securities, people would be indifferent as to which security they held.

Question

Quizplus · Accepted Answer

People would prefer the 2-year security because it offers a higher interest rate compared to the expected returns from consecutively investing in 1-year securities, assuming they are risk-neutral and prefer higher returns.

If the Interest Rate on a 2-Year Security Was Higher