Question
6. Assume that the preferred habitat theory holds and that the one-year spot rate is 5.50% per annum nominal and that the 18-month spot rate
6.
Assume that the preferred habitat theory holds and that the one-year spot rate is 5.50% per annum nominal and that the 18-month spot rate is 5.25% 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 years time is 5.75% per annum nominal, what is the risk premium for 18 month bonds?
Group of answer choices
0.50%, as there is too little demand for 18 month bonds relative to 12 month bonds
-0.85%, as there is too much demand for 18 month bonds relative to 12 month bonds
1.00%, as there is too little demand for 18 month bonds relative to 12 month bonds
-0.50%, as there is too much demand for 18 month bonds relative to 12 month bonds
-1.00%, as there is too much demand for 18 month bonds relative to 12 month bonds
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