The one-year interest rate over the next three years is expected to be 3.00%, 5.00% 8.00%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.75%. What is the interest rate on the three year bond?

6%

Explanation:

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed.

Solution

interest rate on 3-year bond

Interest rate = [{(1 + 3%) × (1 + 5%) × (1 + 8%)} ^ (1 / 3) - 1] + 0.75%

Interest rate = [(1.16802 ^ 0.33) - 1] + 0.75%

Interest rate = (1.0525- 1) + 0.75%

Interest rate = 0.0525 + 0.0075%

Interest rate = 0.06 OR 6%

answer; yield to maturity;