The current rate of return on a one-year U.S. Government security is 3%. The face value of the bond is $1,000. The rate of return on a two-year U.S. Government security, of the same face value is 5%. according to the expectations theory,
Required:
Question: What is the return on a one-year U.S. Government security purchased one year from today?
A) 10.25%
B) 7.04%
C) 7.24%
D) 9.95%
Note: Please provide reasons to support your answer.