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Given the same interest rates and the liquidity premium for years 2, 3, 4 are as follows. L2=1% , L3=2% , L4=3%. According to the
Given the same interest rates and the liquidity premium for years 2, 3, 4 are as follows. L2=1\% , L3=2\% , L4=3%. According to the Theory of the Liquidity premium , the first year's one year interest rate is 1 R 1 =1.94\% , and the expected one year rates for the following years are as follows, respectively. E( 2 r 1 )=3 \% E( 3 r 1 )=3.74\% and mathbb E ( 4 r 1 )=4.4\% . The four year interest rate (given they are all default-risk free treasury securities)the four-year Security interest rate is (annually) R =%
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