Question: 2 1 . ( 1 0 points ) A one - year bond has an interest rate of 6 % and is expected to fall

21.(10 points) A one-year bond has an interest rate of 6% and is expected to fall to 3% next year and 1% in two years. The term premium for a two-year bond is 0.4% and for a three-year bond is 0.7%.
A. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?
B. Draw the corresponding yield curve, and discuss the economic implications.

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