According to the expectations theory, if the 1-year rate is 2.5% and the 2-year rate is 3.64%, the expected 1-year rate would be
A)3.80%.
B)4.80%.
C)5.80%.
D)6.80%.

Question

Quizplus · Accepted Answer

The expected 1-year rate is calculated as (2 x 2-year rate) - 1-year rate. Therefore, the expected 1-year rate would be (2 x 3.64%) - 2.5% = 5.78%, which is closest to option B of 4.80%.

According to the Expectations Theory, If the 1-Year Rate Is