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: R1 = 5.95 percent
E(r2) = 6.25 percent L2 = 0.05 percent
E(r3) = 6.75 percent L3 = 0.10 percent
E(r4) = 7.15 percent L4 = 0.12 percent
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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