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Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 5.40%. Assume that the pure expectations theory is

Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 5.40%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond. What is the yield on a 1-year T-bond expected to be one year from now?

4.95%

5.75%

5.05%

5.00%

5.80%

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