The Market Rate of Interest on 2 Year Bonds Is

question 8

Multiple Choice

The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:

• A) 0.250%.
• B) 0.005%.
• C) 0.125%.
• D) 0.500%.

---

Definitions:

Second-order Model

In statistics and mathematical modeling, a model that includes terms up to the second power (squared terms) to capture curvature in the relationship between variables.

Significance Level

The probability of rejecting the null hypothesis in a statistical test when it is actually true, typically denoted as alpha.

Motorcycle Fatalities

The number of deaths resulting from accidents involving motorcycles, often used in traffic safety analysis.

Quadratic Relationship

Describes a situation where the relationship between two variables can be expressed through a second-degree polynomial equation.