Question

9. Suppose an investor has two choices:Choice 1: invest in a Bond A which is a 2-year bond with an interest rate of 12% Choice B: two 1-year bonds with sequential interest payment of 10% and 14%?Which Choice would produce a greater return if the pure expectations theory was to hold true. *

A) Choice A
B) Choice B
C) Both of the choices would produce the same return
D) We can’t tell.

Answer 1

the answer is (C) both of the choices would produce the same return