Question

Problem 6-11 Liquidity Premium Theory (LG6-7)

Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

R_{1} |
= | 0.55 | % | |||||

E(_{2}r_{1}) |
= | 1.70 | % | L_{2} |
= | 0.08 | % | |

E(_{3}r_{1}) |
= | 1.80 | % | L_{3} |
= | 0.12 | % | |

E(_{4}r_{1}) |
= | 2.10 | % | L_{4} |
= | 0.14 | % | |

Using the liquidity premium theory, determine the current
(long-term) rates. **(Do not round intermediate calculations.
Round your answers to 2 decimal places.)**

Answer #1

Based on economists’ forecasts and analysis, 1-year Treasury
bill rates and liquidity premiums for the next four years are
expected to be as follows:
R1
=
2.10
%
E(2r1)
=
3.00
%
L2
=
0.07
%
E(3r1)
=
3.40
%
L3
=
0.09
%
E(4r1)
=
3.85
%
L4
=
0.14
%
Using the liquidity premium theory, determine the current
(long-term) rates. (Do not round intermediate calculations.
Round your answers to 2 decimal places.)
YEAR 1
YEAR 2
YEAR 3...

Based on economists’ forecasts and analysis, one-year T-bill
rates and liquidity premiums for the next four years are expected
to be as follows:
1R1
=
5.65
%
E(2r1)
=
6.75
%
L2
=
0.05
%
E(3r1)
=
6.85
%
L3
=
0.10
%
E(4r1)
=
7.15
%
L4
=
0.12
%
Calculate the four annual rates. (Round your answers to 2
decimal places. (e.g., 32.16))
Annual Rates
Year 1
%
Year 2
%
Year 3
%
Year 4
%

Based on economists’ forecasts and analysis, one-year T-bill
rates and liquidity premiums for the next four years are expected
to be as follows:
1R1
=
.50%
E(2r1)
=
.98%
L2
=
0.09%
E(3r1)
=
1.08%
L3
=
0.14%
E(4r1)
=
1.38%
L4
=
0.16%
Calculate the four annual rates. (Round your answers to 2
decimal places. (e.g., 32.16))
Year 1: 0.50%
Year 2: ____%
Year 3: _____%
Year 4: _____%

Based on economists’ forecasts and analysis, one-year T-bill
rates and liquidity premiums for the next four years are expected
to be as follows:
1R1
=
.33%
E(2r1)
=
.70%
L2
=
0.06%
E(3r1)
=
.80%
L3
=
0.15%
E(4r1)
=
1.10%
L4
=
0.16%
Identify the four annual rates. (Round your answers to 2
decimal places. (e.g., 32.16))
Annual Rates
Year
1
%
Year
2
%
Year
3
%
Year
4
%

Based on economists’ forecasts and analysis, one-year T-bill
rates and liquidity premiums for the next four years are expected
to be as follows: 1R1 = .50% E(2r1) = .75% L2 = 0.07% E(3r1) = .85%
L3 = 0.16% E(4r1) = 1.15% L4 = 0.17% Identify the four annual
rates. (Round your answers to 2 decimal places. (e.g., 32.16))
Annual Rates Year 1 .5 % Year 2 % Year 3 % Year 4 %

Your client also wants to determine the Liquidity of his
investment by using Liquidity Premium Theory. Base on the question
1, it shows the information as follows:
1R1 = 1.50%
E(2r1) = 2.5%
E(3r1) = 3.0%
E(4r1) = 3.5%
E(5r1) = 4.5%
In addition, you charge a liquidity premium on longer-term
securities such that:
L2 = 0.15%
L3 = 0.25%
L4 = 0.35%
L5 = 0.40%
Instructions:
1] Please using the Liquidity Premium Theory of
the Term Structure of Interest...

Suppose that the current 1-year rate (1-year spot rate) and
expected 1-year T-bill rates over the following three years (i.e.,
years 2, 3, and 4, respectively) are as follows:
1R1 = 6%,
E(2r1) = 7%,
E(3r1) = 7.60%,
E(4r1) = 7.95%
Using the unbiased expectations theory, calculate the current
(long-term) rates for 1-, 2-, 3-, and 4-year-maturity Treasury
securities. (Round your answers to 2 decimal
places.)

Suppose that the current 1-year rate (1-year spot rate) and
expected 1-year T-bill rates over the following three years (i.e.,
years 2, 3, and 4, respectively) are as follows: 1R1 = 1%, E(2r1) =
4.25%, E(3r1) = 4.75%, E(4r1) = 6.25% Using the unbiased
expectations theory, calculate the current (longterm) rates for 1-,
2-, 3-, and 4-year-maturity Treasury securities. Plot the resulting
yield curve. (Do not round intermediate calculations. Round your
answers to 2 decimal places.)

Question: Suppose that the current one-year rate (one-year spot
rate) and expected one-year T-bill rates over the following 3 years
(i.e., years 2, 3 and 4 respectively) are as follows:
1R1 = 0.4%, E(2r1) = 1.4%, E(3r1) = 8.8% E(4r1) = 9.15%
Using the unbiased expectations theory, calculate the current
(long-term) rates for three-year- and four-year-maturity Treasury
securities. Using the unbiased expectations theory, calculate the
long term rates for one, two, three, and four years maturity
Treasury securities. (Round answers...

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