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( a ) Suppose that the current yield on a one - year government bond is 1 0 percent and the yield on one -

(a) Suppose that the current yield on a one-year government bond is 10 percent and
the yield on one-year government bond is expected to decrease by 2 percent every
year over the next two years.
(i) Calculate the current yield on a long term bond maturing in 2 years and comment
on the yield curve.
(ii) How does the existence of a liquidity premium affect the yields of the 2-year
bonds?
(iii) How would you explain the concept of term structure of interest rates to a lay
person?
(b) Briefly explain the concept and measurement of portfolio risk.
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