Consider the same short-term interest rates as in problem 4 above. If the yield on a discount bond that matures in three years is 5%, then according to liquidity premium theory, the premium attached to the 4 year discount bond is

A) 1.5%

B) 2.75%

C) 0.5%

D) 0.75%

Show your work

Problem 4 :

Analysts predict that short-term interest rates over the next 4 years will be as follows: 3%, 6%, 7%, and 1%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____.

5.33%; 5.75%

5.33%; 4.25%

4.5%; 4.25%

4.5%; 5.75%