Suppose that today you observe the following interest rates on bonds with differing years to maturity:

Years to maturity Interest rate

1 year 1.0 %

2 years 1.5 %

3 years 2.5 %

Assume that the expectations theory is correct, so that there is no term premium for a two-year bond or a three-year bond. From the information above, the expected interest rate on a one-year bond one year from now is 2.00 %. Similarly, the expected interest rate on a one-year bond two years from now is 4.5 %.

Now assume that the liquidity premium theory is correct and that the term premium on the two-year bond is 0.50 %.

In this case,what is the expected interest rate on a one-year bond one year from now will be ? (Round your response to two decimal places.)