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38. Liquidity Premium Hypothesis Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%, and E(2ri) = 8%. If the liquidity premium theory

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38. Liquidity Premium Hypothesis Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%, and E(2ri) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2? A. 1.02% B. 4.04% C. 6.15% D. 12.03%

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