Below are the expected 1-yr. interest rates over the next fi…
Below are the expected 1-yr. interest rates over the next five years along with their respective liquidity premiums Year 1: 3.0% // Liquidity Premium: 0%Year 2: 3.5%// Liquidity Premium: 0.25%Year 3: 4.0% // Liquidity Premium: 0.50%Year 4: 4.5% // Liquidity Premium: 0.75%Year 5: 5.0% // Liquidity Premium: 1% Under expectations theory, the interest rate on a 4yr. bond would be [crazy1] and the interest rate on a 4yr. bond would be [crazy2] under liquidity premium theory.
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