Suppose the Expected One-Month Rates of Return Are 3% P $3.91 \%$

question 38

Multiple Choice

Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.Further,it is found that the liquidity premium for the second and third month is 1.75% and 2.40% respectively.According to the liquidity premium theory,what is the three-month yield?

• A) \( 3.91 \% \)
• B) \( 4.27 \% \)
• C) \( 4.79 \% \)
• D) \( 6.25 \% \)