Question

One-year Treasury bills currently earn 2.50 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.70 percent and that two years from now, 1-year Treasury bill rates will increase to 3.20 percent. The liquidity premium on 2-year securities is 0.05 percent and on 3-year securities is 0.15 percent. If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities? **(Do not round intermediate calculations. Round your answer to 2 decimal places.)**

**Current Rate _____.__%**

Step 1

As per the liquidity premium hypothesis, an investor will hold bonds with long term maturity if the bonds are offered at a premium that will compensate the future uncertainty in their value.

Step 2

Step 3

Substituting the va...

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