Question: a. How does the interest rate on an illiquid bond compare with the interest rate on a liquid bond? How does the interest rate on

a. How does the interest rate on an illiquid bond compare with the interest rate on a liquid bond? How does the interest rate on a bond with high information costs compare with the interest rate on a bond with low information costs. Show using the relevant diagrams.

b. Define what is meant by the 'term structure of interest rates? There are three theories of the term structure; what are they, and how do they explain how interest rates differ? How can the term structure be employed to predict future economic conditions?

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