Homework answers / question archive / Suppose the interest rate on a 1-year T-bond is 1

Suppose the interest rate on a 1-year T-bond is 1

Finance

Share With

Suppose the interest rate on a 1-year T-bond is 1.45% and that on a 2-year T-bond is 2.80%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.20% for a 2-year bond. What is the equilibrium market forecast for   1-year rates 1 year from now?

a)  2.3500%

b)  3.0565%

c)  3.7630%

d)  4.1500%

e)  4.5275%