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Question
Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
a. 12.0%
b. 16.0%
c. 13.5%
d. 10.5%
e. 14.0%
Answer
This answer is hidden. It contains 258 characters.
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