Question

Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

R1	=	1.80	%
E(2r1)	=	2.70	%	L2	=	0.05	%
E(3r1)	=	3.10	%	L3	=	0.07	%
E(4r1)	=	3.55	%	L4	=	0.12	%

Using the liquidity premium theory, determine the current (long-term) rates. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Years	Current (Long-Term) Rates
1		%
2		%
3		%
4		%

Answer 1

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BOND - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Dr General -11AA = = = D A E Wrap Text Merge & Center Σ AutoSum : A Fill 2 m Sort & Find & U 8. $ - % Number Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Font Alignment Cells E F EG EH EL EJEK EL EM EN EO E P Calibri E Copy Paste Format Painter B I Clipboard EE303 ED EE 303 304 305 306 307 308 309 1R1 E(2r1) E(3r1) E(4r1) 1.80% 2.70% 3.10% 3.55% L2 L3 L4 0.05% 0.07% 0.12% LONG TERM RATES 1R1 = 310 1.80% 311 312 1R2= 313 314 ((1+1R1)(1+E(2r1)+L2))^1/2 - 1 ((1+1.80%)(1+2.70%+0.05%))^(1/2) - 1 2.27% 315 316 1R3= 317 ((1+1R1)*((1+E(2r1) + L2)*(1+E(3r1) + L3))^(1/3) - 1 ((1+1.80%)*(1+ 2.70% +0.05%)*(1+ 3.10% +0.07%))^(1/3) - 1 2.57% 1R4 = 318 319 320 321 322 323 HEN Rea ((1+1R1)*((1+E(2r1) + L2)*(1+E(3r1) + L3)*(1 + E(4r1+L4))^(1/4) - 1 ((1+1.80%)*(1+ 2.70% +0.05%)*(1+ 3.10% +0.07%)*(1+3.55% +0.12%))^(1/4) - 1 2.85% Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP, IP, MRP, INFLATION YIELD WARRAN Trefund bond YIELD SPOT 1 ferences CLEAN INVOICE PRICE Sheetl BO! 120% 1 + DOR . * ENG 05-10-2019