Question

The table below shows current and expected future​ one-year interest​ rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond.

Year	​One-Year Bond Rate	Multiyear Bond Rate
1	2.00​%	2.00​%
2	3.00​%	5.00​%
3	4.00​%	7.00​%
4	5.00​%	8.00​%
5	6.00​%	10.00​%

The liquidity premiums for each year are given​ as: ​(Enter your responses rounded to two decimal​ places.)

l11	=	​%
l21	=	​%
l31	=	​%
l41	=	%
l51	=	%

Answer 1

	Liquidity Premium of a Given Year
	= Multiyear Bond Rate of a horizon - Average Expected 1 year Bond Rate over that horizon
	l11
	= Multiyear Bond Rate of Year 1 - Average Expected 1 year Bond Rate over 1 Year
	= 2% - (2%/1)
	= 2% - 2%
	= 0%
	l21
	= Multiyear Bond Rate of Year 2 - Average Expected 1 year Bond Rate over 2 Years
	= 5% - (2%+3%) / 2
	= 5% - 5% / 2
	= 5% - 2.5%
	= 2.5%
	l31
	= Multiyear Bond Rate of Year 3 - Average Expected 1 year Bond Rate over 3 Years
	= 7% - (2%+3%+4%) / 3
	= 7% - 9% / 3
	= 7% - 3%
	= 4%
	l41
	= Multiyear Bond Rate of Year 4 - Average Expected 1 year Bond Rate over 4 Years
	= 8% - (2%+3%+4%+5%) / 4
	= 8% - 14% / 4
	= 8% - 3.5%
	= 4.5%
	l51
	= Multiyear Bond Rate of Year 5 - Average Expected 1 year Bond Rate over 5 Years
	= 10% - (2%+3%+4%+5%+6%) / 5
	= 10% - 20% / 5
	= 10% - 4%
	= 6%