Using the pure expectations approach to the determination of interest rates, calculate the expected ( E ) rate of interest of a one-year investment

Using the pure expectations approach to the determination of interest rates, calculate the expected (

E

) rate

of interest of a one-year investment that will be available in 12 months' time (

1

i

1

), given the following data:

Current rate of return on a one-year-to-maturity (

0

i

1

) instrument: 7.75% per annum

Current rate of return on a two-year maturity (

0

i

2

) instrument: 8.25% per annum

A.

7.75% per annum

B.

8.25% per annum

C.

8.75% per annum

D.

9.25% per annum