Table 5.1
$$\begin{array} { | c | c | r | }
\hline 1 \text { year } & 2 \text { years } & 3 \text { years } \
\hline 1.50 \% & 2.25 \% & 3.25 \% \
\hline
\end{array}$$
Table 5.1 shows the interest rates for Treasury securities of different maturities. Assume that the liquidity premium theory is correct.
-Refer to Table 5.1 On this day,what did investors expect the interest rate to be on the one-year Treasury bill in two years if the term premium on a two-year Treasury note is 0.25%?
A) 1.875%
B) 2.25%
C) 2.375%
D) 2.5%

Question

Table 5.1
 $$\begin{array} { | c | c | r | } 
\hline 1 \text { year } & 2 \text { years } & 3 \text { years } \
\hline 1.50 \% & 2.25 \% & 3.25 \% \
\hline
\end{array}$$ 
Table 5.1 shows the interest rates for Treasury securities of different maturities. Assume that the liquidity premium theory is correct.
-Refer to Table 5.1 On this day,what did investors expect the interest rate to be on the one-year Treasury bill in two years if the term premium on a two-year Treasury note is 0.25%?
A) 1.875%
B) 2.25%
C) 2.375%
D) 2.5%

Quizplus · Accepted Answer

The liquidity premium theory suggests that the interest rate on a long-term bond includes a term premium. The expected interest rate on a one-year Treasury bill in two years can be calculated by adjusting the two-year rate for the term premium: (2.25% - 0.25%) * 2 - 1.50% = 2.5%.

Table 51 Table 51 Shows the Interest Rates for Treasury Securities of Different