Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
R1 = 0.70%
E(r12)= 1.85% L2= 0.05%
E(r13)= 1.95% L3= 0.10%
E(r14)= 2.25% L4= 0.12%
Using the liquidity premium theory, determine the current (long-term) rates.
Note: Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).
