This problem is a little harder Suppose the term structure is set according to pure expectations and the maturity preference theory To be specific, investors require no compensation for holding investments with a maturity of one year, but they demand a premium of 30 percent for holding investments with a maturity of two years Given this information, how much would you pay for a one year STRIPS on February 15, 2009 What is the corresponding implied forward rate Compare your answer to the solutions you found in Problem 16 What does this tell you about the effect of a maturity premium on implied forward rates

Question: This problem is a little harder. Suppose the term structure is set according to pure expectations and the maturity preference theory. To be specific, investors

This problem is a little harder. Suppose the term structure is set according to pure expectations and the preference theory. To be specific, investors require no compensation for holding investments with a of one year, but they demand a premium of .30 percent for holding investments with a of two years. Given this information, how much would you pay for a one-year STRIPS on February 15, 2009? What is the corresponding implied forward rate? Compare your answer to the solutions you found in Problem 16. What does this tell you about the effect of a premium on implied forward rates?

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