Based on Economists' Forecasts and Analysis, One-Year Treasury Bill Rates

question 2

Multiple Choice

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium theory, what is the current rate on a four-year Treasury security?
$$\begin{array} { l l } R _ { 1 } & = 6.65 \% \\E \left( r _ { 2 } \right) & = 7.75 \% L _ { 2 } = 0.10 \% \\E \left( r _ { 3 } \right) & = 7.85 \% L _ { 3 } = 0.20 \% \\E \left( r _ { 4 } \right) & = 8.15 \% L _ { 4 } = 0.25 \%\end{array}$$

• A) 7.736 percent
• B) 7.600 percent
• C) 7.738 percent
• D) 8.400 percent

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Definitions:

Annual Interest Rate

The percentage of a sum of money charged for its use per year.

Double

To increase or become twice as much in size, amount, or number.

Value

The importance, worth, or usefulness of something, often determined by its desirability, utility, or rarity.

Savings

The portion of income not spent on consumption or taxes, often set aside for future use or investment.