The question aims to calculate the liquidity premium on a five-year T-bond, but the provided yield of 35.5% is likely a typo and unreasonably high. The average expected return on one-year T-bills is needed to find the liquidity premium, by comparing it with the T-bond's expected yield, which is typically a single-digit percentage.
The student has asked about the calculation of the liquidity premium on a five-year T-bond, given the one-year T-bill rates for the next five years and the current yield of the five-year T-bonds. However, the information provided is insufficient to calculate the liquidity premium directly. The expected one-year T-bill rates are 4%, 5%, 6%, 6.5%, and 8% for the next five years. To determine the liquidity premium, we would also need to know the expected yield of the five-year T-bonds, which would be the average of the given one-year T-bill rates if they were to be held to their respective maturities, adjusted for expectations of future interest rates. The given 35.5% yield for the five-year T-bond seems to be incorrect as it is unreasonably high; typically, the yield should be a single-digit percentage. Assuming this is a typo and the actual yield might be 3.5%, we would use the average yield of the T-bills to estimate the expected return for a risk-free five-year investment and then compare this to the T-bond's yield to find the liquidity premium.