Finance Question Suppose we observe the following rates R 1 1 1 5 0 , R 2 1 1 8 0 , and E ( r 1 2 ) 2 1 0 If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2

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Finance Question: Suppose we observe the following rates: R 1 1 = 1 5 . 0 % , R 2 1 = 1 8 .

Finance Question: Suppose we observe the following rates: R

11 = 15.0 %,

21 = 18.0 %,

and E

(

12) = 21.0 % .

If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year

2 ?

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