Question

One-year Treasury bills currently earn 2.30 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.50 percent and that two years from now, 1-year Treasury bill rates will increase to 3.00 percent. The liquidity premium on 2-year securities is 0.15 percent and on 3-year securities is 0.25 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.)

Answer 1

The current rate be on 3-year Treasury securities is 2.85%

Step-by-step explanation:

current rate of interest = Average interest rate + liquidity premium

Average interest rate for 3 Year = (2.30% + 2.50% +3%)/3

= 2.6%

Liquidity premium for 3 year security = 0.25%

current rate on 3 year Treasury security = 2.6% + 0.25%

= 2.85%

Therefore, The current rate be on 3-year Treasury securities is 2.85%