Ask Question
14 November, 09:54

He Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent. The one-year interest rate expected in three years is E (4r1), 5.25 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L4?

0.0375 percent

0.504 percent

5.01 percent

5.04 percent

+4
Answers (1)
  1. 14 November, 10:08
    0
    1 + 1R4 = { (1 + 1R3) (1 + E (4r1) + L4) }1/4

    1.0500 = { (1.0475) ^3 (1 + 0.0525 + L4) }1/4

    (1.0500) ^4 = (1.0475) 3^ (1 + 0.0525 + L4)

    (1.0500) ^4 / (1.0475) ^3 = 1 + 0.0525 + L4

    (1.0500) 4 / (1.0475) ^3-1.0525

    L4=.0050358564 = 0.504%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “He Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers