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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 oneyear government bond is percent and
the yield on oneyear government bond is expected to decrease by percent every
year over the next two years.
i Calculate the current yield on a long term bond maturing in years and comment
on the yield curve.
ii How does the existence of a liquidity premium affect the yields of the 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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