Reference no: EM132672514

Problem 1: Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

Option 1: unbiased expectations theory

Option 2: supply and demand theory

Option 3: liquidity premium hypothesis

Option 4: market segmentation theory

Problem 2: One-year Treasury bills currently earn 3.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent and that two years from now, one-year Treasury bill rates will increase to 4.05 percent. If the unbiased expectations theory is correct, what should the current rate be on three-year Treasury securities?

Option 1: 3.75 percent

Option 2: 3.62 percent

Option 3: 3.85 percent

Option 4: 3.40 percent