Estimating the 1-year forward rate

2. Suppose the interest rate on a 1-year T-bond is 1.0% and that on a 2-year T-bond is 3.0%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.2% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now?

a. 3.88%

b. 4.22%

c. 4.63%

d. 5.04%

e. 5.75%