Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent. Assume that there is no term premium on a one-year bond. Suppose the term premium equals 0.75 percent ´ the number of years to maturity, for the two-year bond. The interest rate today on the two-year bond is
a. 5.00 percent.
b. 3.25 percent.
c. 4.00 percent.
d. 4.75 percent.