1. Liquidity Premium Hypothesis One-year Treasury bills currently earn 5.20 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.35 percent. The liquidity premium on two-year securities is .155 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?
5.2750%
5.3520%
3.5680%
10.7050%
2. Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 3.40 percent. For all securities, the inflation risk premium is 2.40 percent and the real interest rate is 2.45 percent. The security's liquidity risk premium is .95 percent and maturity risk premium is 1.30 percent.
The security has no special covenants. What is the security's equilibrium rate of return?
21.00%
2.10%
4.35%
10.50%