Suppose We Observe the Following Rates: ₁R₁ = 8 Percent

question 44

Multiple Choice

Suppose we observe the following rates: ₁R₁ = 8 percent, ₁R₂ = 10 percent, and E(₂r₁) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

• A) 1.02 percent
• B) 4.04 percent
• C) 6.15 percent
• D) 12.03 percent

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Definitions:

PMI

Point of maximal impulse; the location on the chest wall where the heart's impulse can be most strongly felt.

Midclavicular Line

An imaginary line on the body extending from the midpoint of the clavicle vertically down the torso.

Jugular Vein

A large vein in the neck that carries blood from the head to the heart.

Systole

The phase of the heart cycle during which the heart muscles contract and pump blood from the chambers into the arteries.