The wall street journal reports that the rate on three-year treasury securities is 5.25 percent and the rate on four-year treasury securities is 5.50 percent.
a. according to the unbiased expectations hypothesis, what does the market expect the one-year treasury rate to be in year 4, e(4r1)?
b. suppose the one-year interest rate expected in year four, e(4r1), is 6.10% instead of 6.25%. according to the liquidity premium hypothesis, what is the liquidity premium on the four-year treasury security, l4?
c. suppose the one-year interest rate expected in year four, e(4r1), is 7.00% instead, what are the possible explanantion?