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Suppose we observe the following rates: ? 1 R 1 = 0 . 6 0 % , ? 1 R 2 = 1 . 2

Suppose we observe the following rates: ?1R1=0.60%,?1R2=
1.25%, and E(2r1)=0.933%. If the liquidity premium theory of the
term structure of interest rates holds, what is the liquidity
premium for year 2,L2?
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