1 Term Structure of Interest Rate, 4 points Consider an economy in which there is no risk of default. The rate of return of a one-year zero coupon bond is 4% and the interest rate is expected to remain constant. 1. Assume the price when issued of a 10-year zero coupon bond with face value of 1000 dollars is 950 dollars. How much is the liquidity premium? 2. Now imagine that there is no liquidity premium but the interest rate is no longer expected to be fixed. If the price of the same 10-year zero coupon with a face value of 1000 dollars is still 950 dollars, what is the expected average interest rate from years 2 to 10? 3. Now imagine that there is no liquidity premium and the interest rate is expected to remain fixed. What should be the price of the zero-coupon 10-year bond with a face value of 1000 dollars? 4. How can you explain an inverted yield curve through the expectation of investors