Suppose We Observe the Following Rates: ₁R₁ = 13%, ₁R₂

question 15

Multiple Choice

Suppose we observe the following rates: ₁R₁ = 13%, ₁R₂ = 16%, and E(₂r₁) = 10%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

• A) 8.7%
• B) 9.1%
• C) 9.7%
• D) 10.0%

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