Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the1-yearinterest rate expectedduringYear 3? (Base your answer on an arithmetic rather than geometric average.)

Select one:

a. 13.5%b. 12.0%c. 14.0%d. 16.0%e. 10.5%