Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the
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Question:
Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 1-year Treasury bond is 6 percent in Year 1 and the rate on a 1-year Treasury bond in Year 2 (that is, 1-year Treasury rate one year from now) is 10 percent, what rate of interest should you expect on a 2-year Treasury bond now?
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