Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. Assume that you invest $1000 in a one-year bond today and plan to reinvest in another one-year bond again when the current bond matures. The expectations theory of the term structure implies that your expected rate of return for buying a two-year bond today is ________%.

A) 2.5 B) 4 C) 5 D) 1

My thinking is: (4+1)/2=2.5%

But the answer is A, I'm not sure if 5% is the annual rate or two year's rate