The table below shows current and expected future one-year interest rates, as well as current interest...
The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-
| Year | One-Year Bond Rate | Multiyear Bond Rate |
|---|---|---|
| 1 | 2.00% | 2.00% |
| 2 | 4.00% | 4.00% |
| 3 | 7.00% | 5.00% |
| 4 | 9.00% | 7.00% |
| 5 | 11.00% | 10.00% |
The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.)
Homework Answers
l11 = 0.02 - (0.02 / 1) = 0.02 - 0.02 = 0 = 0.00%
l21 = 0.04 - [(0.04 + 0.02) / 2] = 0.04 - (0.06 / 2) = 0.04 - 0.03 = 0.01 = 2.00%
l31 = 0.05 - [(0.07 + 0.04 + 0.02) / 3] = 0.05 - (0.13 / 3) = 0.05 - 0.0433 = 0.0067 = 0.67%
l41 = 0.07 - [(0.09 + 0.07 + 0.04 + 0.02) / 4] = 0.07 - (0.22 / 4) = 0.07 - 0.055 = 0.015 = 1.50%
l51 = 0.10 - [(0.11 + 0.09 + 0.07 + 0.04 + 0.02) / 5] = 0.10 - (0.33 / 5) = 0.10 - 0.066 = 0.034 = 3.40%
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