Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero. Which of the following statements is CORRECT?

Question 2 options:

	The interest rate today on a 3-year bond should be approximately 8%.
	The interest rate today on a 2-year bond should be approximately 7%.
	The interest rate today on a 2-year bond starting one year from today should be approximately 7.5%.
	The interest rate today on a 2-year bond should be approximately 6%.
	The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.