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Expect a 6-year bond

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Reference no: EM133118859

Using liquidity premium theory:

You observe that there is a one-year Treasury bond with a yield of 2.0%. You also assume that rates will be going up and that the one-year bond will go up by 0.5% each year. As an example, you expect the one-year bond in year 2 will be 2.5% and 3% in year 3.

1. With that information, what do you expect the 3-year interest rate to be if you require a liquidity premium of 0.15% for each year beyond year one?

2. Using the same information, what interest rate would you expect a 6-year bond to have under the liquidity premium theory?

Reference no: EM133118859

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