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Suppose the Expected One-Month Rates of Return Are 3% P 3.91% 3.91 \%

Question 31

Multiple Choice

Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.Further,it is found that the liquidity premium for the second and third month is 1.75% and 2.40% respectively.According to the liquidity premium theory,what is the three-month yield?


A) 3.91% 3.91 \%
B) 4.27% 4.27 \%
C) 4.79% 4.79 \%
D) 6.25% 6.25 \%

Correct Answer:

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