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Liquidity premium theory

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Reference no: EM133081104

Please use the the following information for a and b:

The current four-year interest rate is 6.05%

The current one-year interest rate is 3.0%The expected one-year rate for one year from now is 5.0%

The expected one-year rate for two years from now is 6.5%

a. Assuming the Expections Hypothesis is correct, what is the expected one-year rate for three years from now?

b. Assuming the Liquidity Premium Theory is correct, and, if the expected one year rate is 4.5% three years from now, what is the Liquidity Premium?

Please using based on the following formula

Reference no: EM133081104

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