Assume that the preferred habitat theory holds and that the one-year spot rate is 5.50% per annum nominal and that the 18-month spot rate is 5.25% per annum nominal. Assuming that investors have a preferred investment horizon of 18 months and semi-annual compounding and that the expected six-month rate in one year’s time is 5.00% per annum nominal, what is the risk premium for 18 month bonds?

Group of answer choices

-0.50%, as there is too much demand for 18 month bonds relative to 12 month bonds

-0.25%, as there is too much demand for 18 month bonds relative to 12 month bonds

0.25%, as there is too little demand for 18 month bonds relative to 12 month bonds

0.50%, as there is too little demand for 18 month bonds relative to 12 month bonds

-0.10%, as there is too much demand for 18 month bonds relative to 12 month bonds

Answer rating: 100% (QA)

Solution 025 as t... View the full answer