5. (20pts) Economists have forecasted one-year T-bill rates for the following three years, as follows: Year 1 2 3 1-Year Rate (%) 2.00 2.50 3.00 There is a liquidity premium of 0.25% for the first two years and 0.50% for the third year. (1) (5pts) Find out the term structure of interest rates. (2) (5pts) What is the price of a 3-year T-bond with coupon rate 3% and face value $1000? Coupons are paid annually. (3) (5pts) Suppose you only plan to hold the 3-year T-bond for two years. What is the expected holding period return? (4) (5pts) Suppose after one year, spot rates of all maturities go up 1% (in absolute terms) from the current spot rates. After two years, spot rates of all maturities go down 0.5% (in absolute terms) from the spot rates at the end of year 1. Calculate the realized holding period return for holding the bond for two years. 5. (20pts) Economists have forecasted one-year T-bill rates for the following three years, as follows: Year 1 2 3 1-Year Rate (%) 2.00 2.50 3.00 There is a liquidity premium of 0.25% for the first two years and 0.50% for the third year. (1) (5pts) Find out the term structure of interest rates. (2) (5pts) What is the price of a 3-year T-bond with coupon rate 3% and face value $1000? Coupons are paid annually. (3) (5pts) Suppose you only plan to hold the 3-year T-bond for two years. What is the expected holding period return? (4) (5pts) Suppose after one year, spot rates of all maturities go up 1% (in absolute terms) from the current spot rates. After two years, spot rates of all maturities go down 0.5% (in absolute terms) from the spot rates at the end of year 1. Calculate the realized holding period return for holding the bond for two years