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28 August, 16:43

Liquidity Premium Theory One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity premium theory is correct, what should the current rate be on two-year Treasury securities?

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  1. 28 August, 16:54
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    The current rate be on two-year Treasury securities should be 3.575%

    Explanation:

    current rate be on two-year Treasury securities

    = [ (1 + 3.45%) (1 + 3.65% + 0.05%) ]^ (1/2) - 1

    = 0.03575

    Therefore, The current rate be on two-year Treasury securities should be 3.575%
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