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marissa [1.9K]
3 years ago
5

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

e liquidity premium is 1.75%, what is the yield on a bond with three years to maturity
Business
1 answer:
sveticcg [70]3 years ago
4 0

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%

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