Liquidity Premium Hypothesis Suppose We Observe the Following Rates: ₁R₁

question 85

Multiple Choice

Liquidity Premium Hypothesis Suppose we observe the following rates: ₁R₁ = 8%, ₁R₂ = 10%, and E(₂r₁) = 8%. 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%
• B) 4.04%
• C) 6.15%
• D) 12.03%

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Risk Aversion

The tendency to avoid taking risks and prefer safer options.

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A type of investment security that pays investors fixed interest or dividend payments until its maturity date.

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A condition in which a person suffers from a sense of powerlessness, arising from persistent failure to succeed or escape from a difficult situation.