Refer to the previous problem. Assume that instead of the expectations theory, the liquidity premium theory holds

Question:

Refer to the previous problem. Assume that instead of the expectations theory, the liquidity premium theory holds true. What will be your answer to parts

(a) and (b), if the following liquidity premiums are expected: 0%; 0.25%, 0.5%, 0.75%, 1%, and 1.25%

respectively?

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