Using the same information, what interest rate (in %s) would you expect a 6-year bond to have under the liquidity premium theory? From Prior: You observe that there is a one-year Treasury bond with a yield of 3.0%. You also assume that rates will be going up and that the one-year bond will go up by 1.0% each year. For example, you expect the one-year bond in year 2 will be 4.0% and 5.0% in year 3. With that information, what do you expect the 3-year interest rate to be (in %s) if you require a liquidity premium of 0.15% for each year beyond year one?
Using the same information, what interest rate (in %s) would you expect a 6-year bond to have under the liquidity premium theory? From Prior: You observe that there is a one-year Treasury bond with a yield of 3.0%. You also assume that rates will be going up and that the one-year bond will go up by 1.0% each year. For example, you expect the one-year bond in year 2 will be 4.0% and 5.0% in year 3. With that information, what do you expect the 3-year interest rate to be (in %s) if you require a liquidity premium of 0.15% for each year beyond year one?
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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Answer both questions
Transcribed Image Text:Using the same information, what interest rate (in %s) would you expect a 6-year
bond to have under the liquidity premium theory?
From Prior:
You observe that there is a one-year Treasury bond with a yield of 3.0%. You also
assume that rates will be going up and that the one-year bond will go up by 1.0% each
year. For example, you expect the one-year bond in year 2 will be 4.0% and 5.0% in
year 3.
With that information, what do you expect the 3-year interest rate to be (in %s) if you
require a liquidity premium of 0.15% for each year beyond year one?
3.75
Use this information for this and the next question.
You observe a one-year discount US Treasury bond in the market with the following
characteristics: Face Value of $100 and Price of $95.
What is the implied one-year interest rate (in %s)?
5
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