One-year Treasury bills currently earn 2.80 percent. You expect that one year from now, 1-year Treasury...
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One-year Treasury bills currently earn 2.80 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.00 percent and that two years from now, 1-year Treasury bill rates will increase to 3.50 percent. The liquidity premium on 2-year securities is 0.10 percent and on 3-year securities is 0.20 percent. If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Homework Answers
Current rate on 3-year treasury securities:
= [(1+2.8%)×(1+3%+0.1%)×(1+3.5%+0.2%)]^(1/3)-1
= 3.20%
Hence, current rate be on 3-year Treasury securities is 3.20%
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