One-year Treasury bills currently earn 3.60 percent. You expect that one year fr

Question

One-year Treasury bills currently earn 3.60 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.80 percent. The liquidity premium on 2-year securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.) SHOW DETAIL STEP BY STEP

One-year Treasury bills currently earn 3.60 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.80 percent. The liquidity premium on 2-year securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.) SHOW DETAIL STEP BY STEP

Explanation / Answer

Answer is 3.72%

1 R 2 = [(1 + r)(1 +g + liquidity premium)] 1/t – 1

1 R 2 =((1+0.036)*(1+0.038+ 0.0005))^(1/2)-1= 3.72%

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