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One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, 1-year Treasury...

One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.95 percent. The liquidity premium on 2-year securities is 0.08 percent. If the liquidity theory is correct, what should the current rate be on 2-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Current Rate=

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Answer #1

Current Rate = [(1 + 0.0375)(1 + 0.0395 + 0.0008)]0.5 - 1 = 3.89%

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