Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates. Spot Liquidity premium rate (basis points) 2.65% 0 3.24% 20 3 3.98% 30
Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates. Spot Liquidity premium rate (basis points) 2.65% 0 3.24% 20 3 3.98% 30
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
Problem 1PS
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Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a liquidity premium for holding longer term investments. Given the information below, what are the expected one year rates in one year and in two years? Assume annual interest rates.
|
|
Spot |
Liquidity premium |
|
|
rate |
(basis points) |
|
|
2.65% |
0 |
|
|
3.24% |
20 |
|
3 |
3.98% |
30 |
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