Question: Consider the following term structure: N i_n 1 1.75% 2 2.43% 3 2.61% 4 2.63% Suppose that the expected rate on a 1-year security for

Consider the following term structure:

N i_n

1 1.75%

2 2.43%

3 2.61%

4 2.63% Suppose that the expected rate on a 1-year security for the beginning of year 3 is 3.10%. According to the liquidity preference theory, what is the liquidity premium for year 3? a. 0.45% b. 0.60% c. 0.21% d. 0.74%

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