Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiumsfor the next four years are expected to be as follows:R1 = 7.20%E(r2)8.30% L2.65%%3DE(r3)= 8.40% L3= .75%E(r4)= 8.70% L4 = .80%Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security?

R1 = 7.2% E(r2) = 8.3% L2 = 0.65% E(r3) = 8.4% L3 = 0.75% E(r4) = 8.7% L4 = 0.8%

Answered: Liquidity Premium Hypothesis Based on…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 18P

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Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 0.90 % E(2r1) = 2.05 % L2 = 0.09 % E(3r1) = 2.15 % L3 = 0.12 % E(4r1) = 2.45 % L4 = 0.14 % Using the liquidity premium theory, determine the current (long-term) rates. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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