Problem:
One-year Treasury bills currently earn 3.20 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.40 percent and that two years from now, 1-year Treasury bill rates will increase to 3.90 percent. The liquidity premium on 2-year securities is 0.10 percent and on 3-year securities is 0.20 percent.
Required:
If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities?
Note: Provide support for your rationale.