One-year interest rates are 5 percent. The market expects one-year rates to be 4 percent one year from now. The market also expects one-year rates will be 3 percent two years from now. Assume that the pure expectations theory holds regarding the term structure. Which of the following statements is most correct?
Today’s two-year interest rate is 7 percent.
The yield curve is downward sloping.
Today’s three-year interest rate is 7 percent.
Today’s three-year interest rate is 9 percent