(Answered) Assume that the current interest rate on a 1-year bond is 8

Engineering

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.)

Select one:

a. 13.5%

b. 12.0%

c. 14.0%

d. 16.0%

e. 10.5%

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