Question: The current interest rate for a one year bond is 16%, the expected interest rates for the same bonds are 12%, 8% and 4% for

The current interest rate for a one year bond is 16%, the expected interest rates for the same bonds are 12%, 8% and 4% for the next 3 years and the liquidity premium is (n-1)%. Draw the yield curve given this data and explain what it predicts about the economy for the near future. Why do we include the liquidity premium when calculating the yield curve?

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