Assume that the one-year interest rates over the next four years are expected to be 7%, 8%, 9%, and 10%. The liquidity premiums for one- to four-year bonds are 0%, 0.5%, 0.75%, 1.25%. What is the interest rate on a three- year bond? Select one: OA. 8.75% B. 9.25%

Assume that the one-year interest rates over the next four years are expected to be 7%, 8%, 9%, and 10%. The liquidity premiums for one- to four-year bonds are 0%, 0.5%, 0.75%, 1.25%. What is the interest rate on a three- year bond? Select one: OA. 8.75% B. 9.25%

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter5: The Cost Of Money (interest Rates)

Section: Chapter Questions

Problem 11PROB

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

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Assume that the one-year interest rates over the next four years are expected to be 7%, 8%, 9%, and 10%. The
liquidity premiums for one- to four-year bonds are 0%, 0.5%, 0.75%, 1.25%. What is the interest rate on a three-
year bond?
Select one:
O A.
8.75%
O B.
9.25%
Oc.
8.25%
OD.
8%

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