Please explain how was the solution obtained. Show complete work. Thank you.
Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond, then your expected rate of return for this $1 investment is ________%. The expectations theory of the term structure implies that the current interest rate on 2-year bond must be ________%.
A) 1; 1
B) 4; 4
C) 5; 5
D) 5; 2.5
E) 4; 2