Suppose that i =7% (n=1), and that future short term (1 year) interest rates are expected...

 

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Suppose that i =7% (n=1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium In,t for n=2 and 3 is 0.25% and 0.35% respectively. a. Use the liquidity premium theory to calculate in,t for n=2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use. b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise. Suppose that i =7% (n=1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium In,t for n=2 and 3 is 0.25% and 0.35% respectively. a. Use the liquidity premium theory to calculate in,t for n=2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use. b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise.

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a To calculate the liquidity premium Int for n2 and 3 we can use the liquidity premium theory formul... View the full answer