The current one-year Treasury rate is 5.92% and the two-year rate is 4.89%. Furthermore, you believe there is a liquidity premium for t=1 to t=2 of 0.3%. What is the one-year rate expected one year from today (E(1r2)). Enter in percent form without the percent sign.
Let forward rate from year 1 to year 2 be denoted as f2. which can be calculated as
f2 = (1+r2)2 / (1+r1)-1
where r2 is the two year rate and r1 is the one year rate
=(1+0.0489)2/(1+0.0592) - 1
=0.0387
= 3.87%
Now, since there is a liquidity premium of 0.3% , The Expected One year rate one year from today will be
E(r) = f2 - liquidity premium
=3.87%-0.3%
=3.57%
The answer without percentage sign is 3.57
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