Consider the previous question with the same yield curve. Now suppose I tell you tha market participants are risk averse. They require a liquidity premium of 0.50% to hold the 2-year bond, a liquidity premium of 1.00% to hold the 3-year bond, and a liquidit premium of 1.50% to hold the 4-year bond. Then, according to the liquidity preferen theory, the market's expectation of the one-year interest rate on July 1st, 2023 is 4.00 percent. Moreover, the market's expectation of the three-year interest rate on July 1st 2023 percent

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A10
Yield Curve
6.00%
5.50%
5.00%
4.50%
4.00%
3.50%
3.00%
0
1
2
3
4
5
Consider the previous question with the same yield curve. Now suppose I tell you that
market participants are risk averse. They require a liquidity premium of 0.50% to hold
the 2-year bond, a liquidity premium of 1.00% to hold the 3-year bond, and a liquidity
premium of 1.50% to hold the 4-year bond. Then, according to the liquidity preference
theory, the market's expectation of the one-year interest rate on July 1st, 2023 is
4.00
percent. Moreover, the market's expectation of the three-year
interest rate on July 1st, 2023 is
percent.
Transcribed Image Text:Yield Curve 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 0 1 2 3 4 5 Consider the previous question with the same yield curve. Now suppose I tell you that market participants are risk averse. They require a liquidity premium of 0.50% to hold the 2-year bond, a liquidity premium of 1.00% to hold the 3-year bond, and a liquidity premium of 1.50% to hold the 4-year bond. Then, according to the liquidity preference theory, the market's expectation of the one-year interest rate on July 1st, 2023 is 4.00 percent. Moreover, the market's expectation of the three-year interest rate on July 1st, 2023 is percent.
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