The current rate of return on a one-year U.S. Government security is 3%. The rate of return on a two-year U.S. Government security is 5%. According to the expectations theory, what is the return on a one-year U.S. Government security purchased one year from today? (Round to the nearest basis point. )

Select one:

a. 2.10%

b. 7.04%

c. 6.96%

d. 7.12%