Short-term (one-year) interest rates over the next 3 years are 3.0%, 3.0%, and 3.0%. In other words,
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- Short-term (one-year) interest rates over the next 3 years are 3.0%, 3.0%, and 3.0%. In other words, short-term interest rates are expected to stay near their current level (3%). A liquidity premium of 15 basis points is required for each year of a bond's maturity. Assume the liquidity premium theory of the term structure holds. What is the shape of the yield curve - flat, with upward slope, or with downward slope?
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