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

question 89

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: $$\begin{array} { l l } R _ { 1 } = 6.65 \% & \\E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \\E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \\E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%\end{array}$$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

• A)7.736 percent
• B)7.600 percent
• C)7.738 percent
• D)8.400 percent

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Definitions:

P(A / B)

A conditional probability representing the likelihood of event A occurring given that B has occurred.

Complement

The subset of outcomes in the universal set that are not in the specified event, often used in probability.

Mutually Exclusive

Events that cannot occur at the same time, implying no overlap between outcomes.

Dependent Events

Events whose probability of occurring is influenced by the occurrence of another event.