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Suppose we observe the following rates: 1 R 1 = 1 0 % , 1 R 2 = 1 4 % , and E (

Suppose we observe the following rates:

1 R 1 = 10 %, 1 R 2 = 14 %,

and

E (2 r 1) = 18 % .

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

2 ?

\

table

[[

Maturity

,

Yield

], [

One day,

2.00 %

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