Question

Which of the following are correct?
i. The liquidity premium for a 2-year government bond is higher than the liquidity premium for a 5-year government bond.
ii. The liquidity premium for a 3-year government bond is lower than the liquidity premium for a 3-year corporate bond.
iii. The expected return from holding an illiquid two year zero-coupon bond to maturity is higher than the expected return from buying a liquid one-year zero-coupon bond (and holding it to maturity) followed by investing in another liquid one-year zero coupon bond (and holding it to maturity).
iv. The expected one-year rate in one year's time is lower under the Liquidity Premium Hypothesis than the expected one-year rate in one year's time under the Pure Expectations Hypothesis (assuming that two-year bonds are illiquid and one-year bonds are liquid).

The correct answer is:

Group of answer choices

(i) & (ii) & (iii) & (iv)

(i) & (ii) & (iv)

(ii) & (iii) & (iv)

(i) & (ii) & (iii)

(ii) & (iii)

Answer 1

Option (ii) & (iii)

Following are correct:

ii. The liquidity premium for a 3-year government bond is lower than the liquidity premium for a 3-year corporate bond.

iii. The expected return from holding an illiquid two year zero-coupon bond to maturity is higher than the expected return from buying a liquid one-year zero-coupon bond (and holding it to maturity) followed by investing in another liquid one-year zero coupon bond (and holding it to maturity).