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7. Forward Rate a. Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity
7. Forward Rate
a. Determine the forward rate for various one-year
interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium, Explain
the relationship between the one-year interest rate and
the one-year forward rate while holding the two-year
interest rate constant.
b. Determine the one-year forward rate for the same
one-year interest rate scenarios described in question
(a) while assuming a liquidity premium of 0.4 percent.
Does the relationship between the one-year interest
rate and the forward rate change when the liquidity
premium is considered?
c. Determine how the one-year forward rate would
be affected if the quoted two-year interest rate rises,
while both the quoted one-year interest rate and the
liquidity premium are held constant. Explain the logic
of this relationship.
d. Determine how the one-year forward rate would
be affected if the liquidity premium rises and if the
quoted one-year interest rate is held constant. What
if the quoted two-year interest rate is held constant?
Explain the logic of this relationship.
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