One-year Treasury bills currently earn 3.10 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.30 percent and that two years from now, 1-year Treasury bill rates will increase to 3.80 percent. The liquidity premium on 2-year securities is 0.15 percent and on 3-year securities is 0.25 percent. If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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A:

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.