. Analysts at Bloomington Securities have reported that the annual interest rate being paid on 3-year bonds issued by the U.S. federal government is 3.8%. The annual rate being paid on 2-year federal government bonds is 3.6%, and the rate being paid on 1-year federal government bonds is 3.2%. Assume also that liquidity and maturity risk premiums are zero (as in the examples we worked). According to the Expectations Theory, what annual interest rate does the market expect the federal government to pay on a 2-year bond originating in year 2? [Previous question 5 asks you to compute a different but related implied forward interest rate.]

• A. 4.00%
• B. 4.20%
• C. 3.60%
• D. 4.10%
• E. 3.70%