The Yield on a One-Year Bond Is Currently 5% and the Liquidity

question 58

Essay

The yield on a one-year bond is currently 5% and the liquidity premium is 0.5(n-1)% where n is the years to maturity. You are told that the spread between two- and one-year bonds is positive. What does that tell you about the yield on the two-year bond?

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Definitions:

Geometric Sequence

A succession of numbers where, from the second element onwards, each number is derived by multiplying its precursor by a steady, non-zero coefficient known as the common ratio.

Nth Term

The term that appears in a sequence's nth position, often defined by a formula that relates the term's position in the sequence to its value.

Formula

A formula is a mathematical rule or relationship expressed in symbols.

Sum

The result of adding two or more numbers or entities together.