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: $$\begin{array} { l l } R _ { 1 } = 6.65 \% & \\E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \\E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \\E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%\end{array}$$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

A) 7.736 percent
B) 7.600 percent
C) 7.738 percent
D) 8.400 percent

Correct Answer:

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