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19. Assume that the preferred habitat theory holds and that the one-year spot rate is 4.6% per annum nominal and that the 18 -month spot

image text in transcribed 19. Assume that the preferred habitat theory holds and that the one-year spot rate is 4.6% per annum nominal and that the 18 -month spot rate is 4.8% per annum nominal. Assuming that investors have a preferred investment horizon of 18 months and semi-annual compounding and that the expected six-month rate in one year's time is 4.60% per annum nominal, what is the risk premium for 18 month bonds? A. 0 , as equilibrium has been achieved since the demand for 18 month bonds is correct relative to the demand for 12 month bonds B. +0.40% as there is too little demand for 18 month bonds relative to 12 month bonds C. 0.40%, as there is too much demand for 18 month bonds relative to 12 month bonds D. +0.60%, as there is too little demand for 18 month bonds relative to 12 month bonds E. 0.60%, as there is too much demand for 18 month bonds relative to 12 month bonds

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