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

question 100

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:
$$\begin{array} { l } R _ { 1 } \quad = \quad 5.95 p e r c e n t \\E \left( r _ { 2 } \right) = 6.25 p \text { ercent } L _ { 2 } = 0.05 \text { percent } \\E \left( r _ { 3 } \right) = 6.75 p \mathrm { percent } \quad L _ { 3 } = 0.10 \text { percent } \\E \left( r _ { 4 } \right) = \quad 7.15 \text { percent } \quad L _ { 4 } = 0.12 p e r c e n t \\\end{array}$$
Using the liquidity premium theory, what should be the current rate on four-year Treasury securities?

• A) 6.59 percent
• B) 6.75 percent
• C) 6.82 percent
• D) 7.13 percent

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Definitions:

Stamp Act

A law passed by the British Parliament in 1765 requiring all legal and commercial documents in the American colonies to bear an official tax stamp, leading to widespread protests and contributing to the American Revolutionary movement.

Differential-compound

Refers to a type of compound wound DC generator or motor that combines both series and shunt windings to achieve specific electrical characteristics.

Cumulative-compound

Refers to a type of DC generator where both series and shunt field windings add their magnetic fluxes to produce the total output voltage.

Shunt Field

A coil wound with small wire and having many turns designed to be connected in parallel with the armature of a DC machine.