The wall street journal reports that the rate on three-year treasury securities is 4.75 percent and the rate on four-year treasury securities is 5.00 percent. the one-year interest rate expected in three years is e(4r1), 5.25 percent. according to the liquidity premium theory, what is the liquidity premium on the four-year treasury security, l4?
0.0375 percent0.504 percent5.01 percent5.04 percent

L4= 0.504%

Explanation:

1 +1R4= {(1 +1R3)(1 + E(4r1) +L4)}1/4

1.0500 = {(1.0475)^3(1 + 0.0525 +L4)}1/4

(1.0500)^4= (1.0475)3^(1 + 0.0525 +L4)

(1.0500)^4/(1.0475)^3= 1 + 0.0525 + L4

(1.0500)4/(1.0475)^3-1.0525

L4= .0050358564 = 0.504%

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