The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent.
a. According to the unbiased expectations hypothesis, what does the market expect the one-year Treasury rate to be in year 4, E(4r1)?
b. Suppose the one-year interest rate expected in year four, E(4r1), is 6.10% instead of 6.25%. According to the liquidity premium hypothesis, what is the liquidity premium on the four-year Treasury security, L4?
c. Suppose the one-year interest rate expected in year four, E(4r1), is 7.00% instead, what are the possible explanantion?