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The Wall Street Journal reports that the rate on three-yearTreasury securities is 2.28 percent and...

The Wall Street Journal reports that the rate on three-year Treasury securities is 2.28 percent and the rate on four-year Treasury securities is 2.5 percent. The one-year interest rate expected in three years, E(4r1), is 2.99 percent. According to the liquidity premium hypotheses, what is the liquidity premium on the four-year Treasury security, L4? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)

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Expert Solution

[(1 + 3 year interest rate)^3 * (1 + 1 year interest after 3 years + Liquidity premium)] = (1 + 4 year interest rate)^4

[1.0228^3 * (1 + 0.0299+ Liquidity premium)] = (1 + 0.025)^4

(1.0299+ Liquidity premium) = 1.0316

Liquidity premium = 0.17%

jeff jeffy answered 2 years ago
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