Final answer:
The liquidity premium for year 2, L2, can be calculated using the liquidity premium theory of the term structure of risk-free rates. The formula is L2 = 2r1 - E(2r1), where 2r1 represents the expected rate of return for the first year. Plugging in the values, the liquidity premium is calculated to be 0.189%.
Step-by-step explanation:
The liquidity premium for year 2, L2, can be calculated using the liquidity premium theory of the term structure of risk-free rates. According to this theory, the yield of a security includes a premium for the lack of liquidity. The formula to calculate the liquidity premium is: L2 = 2r1 - E(2r1), where 2r1 represents the expected rate of return for the first year.
In this case, we are given that 1R1 (the rate for the first year) is 0.55% and E(2r1) (the expected rate of return for the second year) is 0.911%. Plugging these values into the formula, we get: L2 = 2(0.55%) - 0.911% = 1.1% - 0.911% = 0.189%.
Therefore, the liquidity premium for year 2, L2, is 0.189%.