6. Suppose the Japanese government issues one-year bonds, two-year bonds, three-year bonds and four-year bonds. The one-year interest rate on the bond is currently 5%, two- year bonds have 5% interest rate, three-year bonds have 4% interest rate and four-year bonds have 4.5% interest rate. Assume that liquidity premium for a one-year investment is 0%, for a two-year investment is 0.5%, for the three-year investment is 1% and for the four-year is 1.5%. (a) Draw the yield curve for the Japanese government bonds. (0.5 point) (b) What does the yield curve predict about future short-term interest rates? Why? (1 point) (c) Suppose the government faces a budget deficit and to that end issues more four-year bonds. How would the yield curve change and why? (0.5 point) (d) Suppose the issuance of bonds raises investors' concerns about the repayment of all Japanese sovereign debt. How would the yield curve change? Why? (0.5 point) 6. Suppose the Japanese government issues one-year bonds, two-year bonds, three-year bonds and four-year bonds. The one-year interest rate on the bond is currently 5%, two- year bonds have 5% interest rate, three-year bonds have 4% interest rate and four-year bonds have 4.5% interest rate. Assume that liquidity premium for a one-year investment is 0%, for a two-year investment is 0.5%, for the three-year investment is 1% and for the four-year is 1.5%. (a) Draw the yield curve for the Japanese government bonds. (0.5 point) (b) What does the yield curve predict about future short-term interest rates? Why? (1 point) (c) Suppose the government faces a budget deficit and to that end issues more four-year bonds. How would the yield curve change and why? (0.5 point) (d) Suppose the issuance of bonds raises investors' concerns about the repayment of all Japanese sovereign debt. How would the yield curve change? Why? (0.5 point)