$($a$)$ Suppose that the current yield on a one$-$year government bond is $10$ percent and

the yield on one$-$year government bond is expected to decrease by $2$ percent every

year over the next two years.

$($i$)$ Calculate the current yield on a long term bond maturing in $2$ years and comment

on the yield curve.

$($ii$)$ How does the existence of a liquidity premium affect the yields of the $2-$year

bonds?

$($iii$)$ How would you explain the concept of term structure of interest rates to a lay

person?

$($b$)$ Briefly explain the concept and measurement of portfolio risk.