The yield on a one-year bond is currently 3% and the expected yield on one-year bonds for the next two years is 5% and 4%. If th

Question

3 years ago

5

e liquidity premium is 1.75%, what is the yield on a bond with three years to maturity

1 answer:

sveticcg [70] · Answer 1 · 2022-05-05T14:05:41+03:00

Answer:

5.75%

Explanation:

The computation of the yield on a bond with three years to maturity is shown below:

Given that

Yield on a one-year bond is 3%

The expected yield on one-year bonds for the next two years is 5% and 4%

And, the liquidity premium is 1.75%

So, the yield on a bond with three years to maturity is

= (3% + 5% + 4%) ÷ 3 years + 1.75%

= 4% + 1.75%

= 5.75%