Suppose we observe the following rates: 1R1 = 6.8%, 1R2 = 7.8%, and E(2r1) = 6.8%....
Suppose we observe the following rates:
1R1 = 6.8%,
1R2 = 7.8%, and
E(2r1) = 6.8%. If the
liquidity premium theory of the term structure of interest rates
holds, what is the liquidity premium for year 2? (Round
your intermediate calculations to 5 decimal places and final answer
to 2 decimal places. (e.g., 32.16))
what is the liquidity premium ?
Homework Answers
![EM60 EF EG EH EI El EK EL EM EN EO EP EQ ER ES ET 42 43 ACCORDING TO LIQUIDITY PREMIUM THEORY OF THE TERM STRUCTURE OF INTEREST RATES 45 46 47 48 49 50 51 52 53 54 1+1R2-[(1+1R1)(1hE(2R1)+L2)/1/2 10.078-[(1+0.068) (1+0.068 L2)]A1/2 SQUARING BOTH THE SIDES 1.162084 [(1.068)(1.068 L2)] 1.0880936 = 1.068 + L2 THEREFORE L2-0.02009 = 2.01% 56 57 58 59 60 YIELD SPOT Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP I MRP. INFLATION YIELD refund bond -CLEAN INVOICE PRICE](http://img.homeworklib.com/questions/e5576cb0-722d-11ea-bb4d-19247fea0868.png?x-oss-process=image/resize,w_560)
Liquidity premium is a premium
demanded by investors when any given security cannot be easily
converted into cash for its fair market value. When the liquidity
premium is high, the asset is said to be illiquid, and investors
demand additional compensation for the added risk of investing
their assets over a longer period of time since valuations can
fluctuate with market effects.
Add Answer to:
Suppose we observe the following rates:
1R1 = 6.8%,
1R2 = 7.8%, and
E(2r1) = 6.8%....
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Suppose we observe the following rates: 1R1 = 10%, 1R2 = 14%, and E(2r1) = 18%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2? (Round your intermediate calculations to 5 decimal places and final answer to 3 decimal places. (e.g., 32.161))
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Suppose we observe the following rates: 1R1 = 4.5%, 1R2 = 6.8%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? (Do not round intermediate calculations. Round your answer to 2 decimal places.
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