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You observe the following market interest rates for both borrowing and lending: The one-year rate = 5%. The two-year rate = 6%. The one-year rate
You observe the following market interest rates for both borrowing and lending: The one-year rate = 5%. The two-year rate = 6%. The one-year rate one year from now = 7.25%. How can you take advantage of these rates to earn a riskless profit? Assume that the expectation theory of interest rates holds. O You borrow at both the one-year and two-year rate and lend at the one-year rate one year from now. O You borrow at the two-year rate and lend at the one-year rate one year from now. You lend at both the one-year rate and the one-year rate one year from now and borrow at the two-year rate. You borrow at the one-year rate and lend at the two-year rate. O You borrow at the two-year rate and lend at the one-year rate one year from now
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