Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: $$\begin{array} { l l }
R _ { 1 } = 6.65 \% & \
E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \
E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \
E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%
\end{array}$$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

Question

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: $$\begin{array} { l l } 
R _ { 1 } = 6.65 \% & \
E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \
E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \
E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%
\end{array}$$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

Quizplus · Accepted Answer

The Answer of Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: $$\begin{array} { l l } 
R _ { 1 } = 6.65 \% & \
E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \
E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \
E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%
\end{array}$$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

Based on Economists' Forecasts and Analysis, One-Year Treasury Bill Rates