#2. (a) Suppose that you are forecasting one-year T-bill rates as follows: Year 1-year rate (%) 3.0 5.0 7.0 4.0 4.0 was, You have a liquidity premium of 0.50% for both one year and two year bonds, 0.75% on both three and four year bonds and a 1.0% liquidity premium for five year bonds. Would you be willing to purchase a four-year bond today with a yield of 5.75%? Explain your answer and show (and briefly explain) any calculations that you make. (5 marks) (b) Rates on one-year T-Bills over the next four years are expected to be 5%, 4%, 2.50% and 2.0%. If a four-year bond today is yielding 3.75%, what is the implied liquidity premium on this four-year bond? Explain and show all your work. (5 marks) (c) What is the shape of the yield curve in part B? What does this say about our expectations? (2 marks) (d) What 3 factors cause a shift in the demand for bonds? (3 marks) #2. (a) Suppose that you are forecasting one-year T-bill rates as follows: Year 1-year rate (%) 3.0 5.0 7.0 4.0 4.0 was, You have a liquidity premium of 0.50% for both one year and two year bonds, 0.75% on both three and four year bonds and a 1.0% liquidity premium for five year bonds. Would you be willing to purchase a four-year bond today with a yield of 5.75%? Explain your answer and show (and briefly explain) any calculations that you make. (5 marks) (b) Rates on one-year T-Bills over the next four years are expected to be 5%, 4%, 2.50% and 2.0%. If a four-year bond today is yielding 3.75%, what is the implied liquidity premium on this four-year bond? Explain and show all your work. (5 marks) (c) What is the shape of the yield curve in part B? What does this say about our expectations? (2 marks) (d) What 3 factors cause a shift in the demand for bonds