Answer the questions below with your own words please

4. The 1-year T-bill rates over the next five years are expected to be 3%, 3.5%, 4%, 4.5%, and 5%. If the 5-year T-bonds are yielding 7%, what is the liquidity premium on this bond?

5. Using the information from question 4, now assume that the investor prefers holding short-term bonds. A liquidity premium of 10 basis points is required for each year of a bonds maturity. What will be the interest rates on a 3-year bond, 4-year bond, and a 5-year bond?

You will do Point No. 5 only

The answer of Point 4 is:

The liquidity premium is computed as follows:

= Yield on 5 year T bonds - (Sum of T bill rates over the next 5 years) / 5

= 7% - (3% + 3.5% + 4% + 4.5% + 5%) / 5

= 7% - 20% / 5

= 7% - 4%

= 3%