A 1-year Treasury bond currently yields 6.0%, and a 2-year bond yields 7.0%. Mr. A, an investor who want to invest for a 2-year horizon is choosing between buying the 2-year security and hold it for 2 years and buy a 1-year security and hold it for 1 year and reinvest the proceeds in another 1-year security. Holding the pure expectation theory, what would be the rate of the 1-year rate 1 year from now so that options of Mr. A will be indifferent?   8% 6% 7% 6.5%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A 1-year Treasury bond currently yields 6.0%, and a 2-year bond yields 7.0%. Mr. A, an investor who want to invest for a 2-year horizon is choosing between buying the 2-year security and hold it for 2 years and buy a 1-year security and hold it for 1 year and reinvest the proceeds in another 1-year security. Holding the pure expectation theory, what would be the rate of the 1-year rate 1 year from now so that options of Mr. A will be indifferent?
 
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7%
6.5%
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