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Question
Assume that the bond market is in equilibrium. The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent. Assume that there is no term premium on a one-year bond. If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds. The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .a. 5.5 percent; 5.8 percent
b. 6.0 percent; 6.3 percent
c. 6.2 percent; 6.8 percent
d. 6.5 percent; 7.3 percent
Answer
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