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Suppose the current 1-year spot rate r1=7% and the market has an expectation as: Please draw the yield curve under expectation theory and the liquidity

Suppose the current 1-year spot rate r1=7% and the market has an expectation as:
Please draw the yield curve under expectation theory and the liquidity premium theory, assuming a term of liquidity premium at 3%. Explain what generates the differences between two yield curves.

E(r.)) = 5%

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Question

Suppose the current 1-year spot rate r1=7% and the market has an expectation as: Please draw the yield curve under expectation theory and the liquidity

Suppose the current 1-year spot rate r1=7% and the market has an expectation as: Please draw the yield curve under expectation theory and the liquidity premium theory, assuming a term of liquidity premium at 3%. Explain what generates the differences between two yield curves.

E(r.)) = 5%

Step by Step Solution

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Principles of Finance

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Suppose the current 1-year spot rate r1=7% and the market has an expectation as:
Please draw the yield curve under expectation theory and the liquidity premium theory, assuming a term of liquidity premium at 3%. Explain what generates the differences between two yield curves.