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Suppose we observe the following rates: 1 R 1 = 10%, 1 R 2 = 14%, and E ( 2 r 1 ) = 18%.

Suppose we observe the following rates: ₁R₁ = 10%, ₁R₂ = 14%, and E(₂r₁) = 18%. 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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