# 74. Using the pure expectations approach to the determination of interest rates, calculate the expected (E) rate of interest of a one-year investment…

74. Using the pure expectations approach to the determination of interest rates, calculate the expected (E) rate of interest of a one-year investment that will be available in 12 months’ time (1i1), given the following data:

Current rate of return on a one-year-to-maturity (0i1) instrument: 7.75% per annum

Current rate of return on a two-year maturity (0i2) instrument: 8.25% per annum

A. 7.75% per annum

B. 8.25% per annum

C. 8.75% per annum

D. 9.25% per annum

75. If investors are not indifferent to whether they hold long-term or short-term securities, and need a liquidity premium to hold longer term securities, an investor who needs a liquidity premium of 0.25% per annum will expect to receive _______ on a two-year investment, given the following data:

(0i1) 8.46% per annum

(E1i1) 8.55% per annum

A. 8.51% per annum

B. 8.63% per annum

C. 8.80% per annum

D. 8.88% per annum

***Please show the full calculation