Question

Now assume that the Liquidity Preference theory is correct (versus the data for the Pure Expectations theory above), and the Maturity Risk Premium can be defined as (0.10%)(t-1), where t is the number of years until maturity. Given this information, determine how much $126,000, to be deposited at the beginning of Year 3, and held over Years 3, 4, 5, and 6 (4 years), would be worth at the end of Year 6.

Answer 1

Answer is explained in the explanations section below.

Step-by-step explanation:

Note: This question is incomplete and lacks necessary data to solve. It actually lacks the tabulated data from which necessary information must be extracted to solve for this question. However, I have found similar question on the internet but with different values in it. Since, this question is altered and lacks its data. So, I will using the data of complete question that I have found. I will solving that for the sake of understanding and concept, so that you can solve such questions once data is complete. Thank you.

Data in the Complete question:

Maturity Risk Premium = (0.16%)(t-1)

Determine how much of $42000, to be deposited at the beginning of Year 3, and held over years 3, 4, 5 and 6 (4 years) would be worth at the end of Year 6.

So,

The necessary missing data is attached in the attachment. Which is given partial in the question. Furthermore, I have filled it completely and attached in the attachment with the name complete table. Refer to that attachment as well.

SO,

Average 4-Year Base Rate for Years 3-6:(0.063 + 0.075 + 0.087 + 0.069) / 4=0.0735

Maturity Risk Premium=(0.16%)*(4-1)=0.0048

4-Year Rate for Years 3-6=0.0735 + 0.0048=0.0783=7.83%

FV=($42,000)*(1.0783)4=$56,781.61

FV = $56,781.61

In conclusion, in this way, you can solve such questions.