Question
A. The table below shows current and expected future one-year interest rates. i) Calculate the interest rates on multi year bonds based on expectation theory.
A. The table below shows current and expected future one-year interest rates. i) Calculate the interest rates on multi year bonds based on expectation theory. (20 marks) ii) Assume that the liquidity premiums for one- to five-year bonds are 0%, 0.25%, 0.5%, 0.75% and 1.0%, respectively. Based on liquidity premium theory, determine the return an investor will require for a 5-year bond. (10 marks) Year One-Year Bond Rate Multiyear Bond Rate 1 2% 2 5% 3 7% 4 8% 5 10% B. Will there be any effect on the interest rates if gold prices become less volatile? Explain your answer in detail. (10 marks) C. Would you be more or less willing to buy long term bonds if you were to expect a bear market in stocks? Explain your answer
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