• Suppose that i_t=6% (n=1), and that future short term interest rates (n=1) for the next 3 years (starting next year) are expected to be: 4%, 2%, 2%. Suppose that the liquidity premium is zero for all n. Calculate i_n,t for n=2, 3, and 4. SHOW ALL WORK. Plot the yield curve.
• Suppose that i_t=5% (n=1), and that future short term interest rates for the next 4 years are not expected to change.The liquidity premium l_n,t for n=2, 3, and 4 is 0.25%, 0.35% and 0.5% respectively. Calculate i_n,t for n=2, 3, and 4. SHOW ALL WORK. Plot the yield curve.