Suppose We Observe the Following Rates: ₁R₁ = 13 Percent

question 32

Multiple Choice

Suppose we observe the following rates: ₁R₁ = 13 percent, ₁R₂ = 16 percent, and E(₂r₁) = 10 percent. 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 percent
• B) 9.1 percent
• C) 9.7 percent
• D) 10.0 percent

---

Definitions:

Mediate Dispute

The act of resolving a conflict or disagreement between two or more parties through the intervention of a neutral third party.

Company Policies

Are guidelines established by businesses to govern their operations, employee behavior, and company procedures.

Work Assignments

Tasks or projects allocated to employees or team members as part of their job responsibilities.

Participative Management

Participative Management is a management approach whereby employees at all levels are involved in the decision-making processes of the organization.