Suppose the interest rate on a 1-year t-bond is 50 and that, Ask an Expert

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Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 6.0%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.4% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now?

a. 6.28%

b. 6.39%

c. 6.50%

d. 6.61%

e. 6.72%

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Financial Management, Finance

Category:- Financial Management
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