Sppose we observe the following rates 1r1 8 percent 1r2 , Ask an Expert

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Suppose we observe the following rates: 1R1 = 8 percent, 1R2 = 10 percent, and E(2r1) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2? 1.02 percent 4.04 percent 6.15 percent 12.03 percent

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