3) Assume that the liquidity premium theory accurately describes the term structure of interest rates, and that the term premium on an n-year bond is given by the following equation:

ln = (n- 1)*(.00375) where n term to maturity (in years)[i.e. (n-1)*(37.5 basis points)]

Assuming the public holds the following expectations (it, iet+1, iet+2, iet+3, iet+4) of short-term interest rates:

a) 5%, 5%, 5%, 5%, 5%

b) 6%, 7%, 8%, 9%, 10%

c) 14%, 10%, 6%, 5%, 5%

In each case, calculate and graph the yield curve for 1- to 5-year bonds,