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Suppose we observe the following rates: 1R1 = .08, 1R2 = .15, and E(2r1) = .14. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?Hint:2.15%6.15%8.45%12.45%14.00%Suppose there are two kinds of cars: Good cars, Lemons. The owner of a used car knows whether it is a lemon but prospective buyers cannot tell. Suppose 40% of all new cars produced are lemons. Good used cars are worth \$15,000 to their owners and lemons are worth only \$10,000. Which of the following is correct?I. If the used cars for sale had the same quality distribution as new cars (i.e., 60% good, 40% lemons), risk-neutral people would willing to pay \$13,000 for a used car.II. The owner of a good used car will able to sell it for \$15,000.III. In the equilibrium, the only used cars for sale will be lemons. They will sell for \$13,000.Suppose there are two kinds of computers: Reliable ones, Ones that crash frequently. Suppose that some fraction z of all personal computers are defective. The defective ones, however, cannot be identified except by those who own them. Consumers are risk-neutral and value nondefective computers at \$1500 each. Computers do not depreciate physically with use. New computers sell for \$1250, used ones for \$500. What is z?1/21/31/41/53/4Wall Street Journal reported interest rates of 4 percent, 4.90 percent, 5.90 percent, and 7 percent for three-year, four-year, five-year, and six-year Treasury note yields, respectively. According to the unbiased expectation theory of the term structure of interest rates, what is the expected one-year rate during year 5?9.00%9.50%10.00%10.50%11.00%

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