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13 September, 01:20

The yield on a one-year bond is currently 3% and the expected yield on one-year bonds for the next two years is 5% and 4%. If the liquidity premium is 1.75%, what is the yield on a bond with three years to maturity

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  1. 13 September, 01:29
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    5.75%

    Explanation:

    The computation of the yield on a bond with three years to maturity is shown below:

    Given that

    Yield on a one-year bond is 3%

    The expected yield on one-year bonds for the next two years is 5% and 4%

    And, the liquidity premium is 1.75%

    So, the yield on a bond with three years to maturity is

    = (3% + 5% + 4%) : 3 years + 1.75%

    = 4% + 1.75%

    = 5.75%
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