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Current interest rate on a 4 year T-bond ( 1 R 4) 5.0% Expected interest rate on a 1 year T-bond 1 year from today
| Current interest rate on a 4 year T-bond (1R4) | 5.0% |
| Expected interest rate on a 1 year T-bond 1 year from today (2f1) | 2.0 % |
| Expected interest rate on a 1 year T-bond 2 years from today (3f1) | 3.25% |
| Expected interest rate on a 1 year T-bond 3 years from today (4f1) | 4.00% |
Required Liquidity Risk Premium:
| 1-year bond (l1) | 0% |
| 2-year bond (l2) | 0.10% |
| 3-year bond (l3) | 0.25% |
| 4-year bond (l4) | 0.30% |
Using the Liquidity Risk premium theory.
What is the current 2-year rate (1R2)? [use geometric average] (please show all steps)
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