Based on Economists' Forecasts and Analysis, One-Year Treasury Bill Rates

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
$$\begin{array} { l } R _ { 1 } \quad = \quad 5.95 p e r c e n t \\E \left( r _ { 2 } \right) = 6.25 p \text { ercent } L _ { 2 } = 0.05 \text { percent } \\E \left( r _ { 3 } \right) = 6.75 p \mathrm { percent } \quad L _ { 3 } = 0.10 \text { percent } \\E \left( r _ { 4 } \right) = \quad 7.15 \text { percent } \quad L _ { 4 } = 0.12 p e r c e n t \\\end{array}$$
Using the liquidity premium theory, what should be the current rate on four-year Treasury securities?

A) 6.59 percent
B) 6.75 percent
C) 6.82 percent
D) 7.13 percent

Correct Answer:

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