An investor with an investment horizon of two years has two investment opportunities:

1.The first investment opportunity is to invest in two-year Treasury bond, yielding 5% per year.

2.The second opportunity is to invest in one-year Treasury bond and then after one year, to roll over an investment into another one year bond. If one year Treasury bond yields 4% and assuming that Expectation Theory holds what should one year bond yield one year from now? Explain fully and show your work. Initial response 250-300 words