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Part $1$

$"$According to the expectations theory of the term$$ structure, it is better to invest in$$ one$-$year bonds, reinvested over two$$ years, than to invest in a$$ two$-$year bond, if interest rates on$$ one$-$year bonds are expected to be the same in both$$ years." Is this statement$$ true, false, or$$ uncertain?

A$.$

$$False: These investments are almost of the same profitability.

B$.$

$$True: The expected return on$$ one$-$year bonds, reinvested over two$$ years, is always higher at amount

i Subscript t minus i Subscript t plus $1$ Superscript eit$$iet$+1.$

C$.$

$$Uncertain: The answer depends on whether we can ignore the

left parenthesis i Subscript $2$ t Baseline right parenthesis squaredi$2$t$2$

and

i Subscript t minus i Subscript t plus $1$ Superscript eit$$iet$+1$

values.