Suppose that your forecasted interest rates on a one-year T-bill issued by National Bank are 9.25%, 10.15%,
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Question:
- Suppose that your forecasted interest rates on a one-year T-bill issued by National Bank are 9.25%, 10.15%, 11.50%, 12.25%, 13.10%, and 8,20% in years 1,2,3,4,5 and 6 respectively. Additionally, you will receive a liquidity premium of 0.25% each year for holding the longer-term bond. Would you be indifferent between purchasing these T-bills each year for the next 5 years and buying a different 5-year Government Bond that yields a 13.11% interest rate after five years?
- Briefly illustrate your answer using the relevant theory of term structure.
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