The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:
A) 0.25%.
B) 0.005%.
C) 0.125%.
D) 0.50%.

Question

Quizplus · Accepted Answer

The Answer of The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:
A) 0.25%.
B) 0.005%.
C) 0.125%.
D) 0.50%.

The Market Rate of Interest on 2 Year Bonds Is