The Market Rate of Interest on 2 Year Bonds Is

question 50

Multiple Choice

The market rate of interest on 2 year bonds is 6.25% while the rate on a one year bond maturing on one year is 5.50%. The forward rate on a one year bond one year from now is 6.5%. The liquidity premium to induce investors to hold the 2 year bond is:

• A) 0.25%.
• B) 0.005%.
• C) 0.125%.
• D) 0.50%.

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