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Expectations theory

The interest rate on 1-year Treasury securities is 5 percent. The interest rate on 2-year Treasury securities is 6 percent. The expectations theory is assumed to be correct. Which of the following statements is most correct?

a.The maturity risk premium is positive.
b.The market expects that 1-year rates will be 5.5 percent one year from now.
c.The market expects that 1-year rates will be 7 percent one year from now.
d.The yield curve is downward sloping.
e.None of the statements above is correct.

Solution Summary

Expectations theory is depicted.

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