Question

Liquidity Premium Theory One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity premium theory is correct, what should the current rate be on two-year Treasury securities?

Answer 1

The current rate be on two-year Treasury securities should be 3.575%

Step-by-step explanation:

current rate be on two-year Treasury securities

= [(1 + 3.45%)(1 + 3.65% + 0.05%)]^(1/2) - 1

= 0.03575

Therefore, The current rate be on two-year Treasury securities should be 3.575%