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The yield on a one-year Treasury bond currently is 2.2 percent, the yield on a 2-year...

The yield on a one-year Treasury bond currently is 2.2 percent, the yield on a 2-year T-bond is 2.0 percent, and the yield on a 3-year T-bond is 2.7 percent. The maturity risk premium on these bonds is zero (0). What is the expected one year (12-month) interest rate in the second year (in Year 2)?

a. 2.0%

b. 4.1%

c. 2.1%

d. 1.8%

e. 2.3%

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Answer #1

One-year rate in one year: = (1+2%)^2/(1+2.2%)-1 = 1.8% Hence, correct option is d. 1.8% *Please rate thumbs up

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