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A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and to 2% in two years. The

A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and to 2% in two years. The term premium for a two-year bond is 0.3% and for a three-year bond 0.5%. What are the interest rates on a two-year bond and three-year bond according to the preferred habitat theory? Why the term premium increases with maturity?

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