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Analysts at Irish Setter Securities have reported that the annual interest rate being paid on 3-year bonds issued by the U.S. federal government is 4.2%.

  • Analysts at Irish Setter Securities have reported that the annual interest rate being paid on 3-year bonds issued by the U.S. federal government is 4.2%. The annual rate being paid on 2-year federal government bonds is 3.9%, and the rate being paid on 1-year federal government bonds is 3.7%. Assume also that liquidity and maturity risk premiums are zero. 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?
  • A.4.80%
  • B.3.90%
  • C.4.45%
  • D.4.05%
  • E.4.10%

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