Question

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	%

Answer 1

1R1	=	0.33%	0.0033
E(2r1)	=	0.70%	L2	=	0.06%
E(3r1)	=	0.80%	L3	=	0.15%
E(4r1)	=	1.10%	L4	=	0.16%
Year 1	(1+0.0033)^1-1	0.0033	0.33%
Year 2	[(1 + .0033)(1 + .0070 + .0006)]^0.50 - 1	0.00545	0.545%
Year 3	[(1 + .0033)(1 + .0070 + .0006)(1+0.0080+0.0015)]^1/3 - 1	0.00680	0.68%
Year 4	[(1 + .0033)(1 + .0070 + .0006)(1 + .0080 + .0015)(1 + .0110 + .0016)] 1/4 - 1	0.032	3.20%