Suppose you are asked to make a loan for 10% from one year for now; you decided

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Suppose you are asked to make a loan for 10% from one year for now; you decided to compare interest rates with Government bonds and make at least 2% premium over that. One-year bond has 5% yield and two-year bond has 7% yield.

You have been harmed about liquidity risk, so you evaluated it at 0.5% liquid premium for the two-year bond. The one-year bond has zero liquid premium.

Given this data, are you willing to make a loan? In other words, are you willing to lend with 10% return? Show calculations.

Posted Date: Oct 05, 2021 03:00 AM

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Suppose you are asked to make a loan for 10% from one year for now; you decided

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One Year forward rate on government bond 172151 904 L... View the full answer

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