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8) 2+1+2 points Assume the interest rate on a 1 year bond is 2 percent and is expected to have a path of 3, 3,
8) 2+1+2 points Assume the interest rate on a 1 year bond is 2 percent and is expected to have a path of 3, 3, 3.5, and 3 percent over the next four years and the liquidity premium is given by lot = (n-1)(0.02)% a. Calculate the yield today on 2 year, 3 year, 4 year and 5 year bonds respectively. Draw the yield curve. b. What information do we derive on future economic growth and inflation from this yield curve? c. If the Bank of Canada suddenly lowers the overnight interest rate and people expect it to be a permanent change what will be the effect on the yield curve. Explain
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