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Assume that the liquidity preference hypothesis holds and use the following table to answer next 3 questions Year from today 1 2 3 1-Year Forward

Assume that the liquidity preference hypothesis holds and use the following table to answernext 3 questions

Year from today

1 2 3

1-Year Forward Rate

2.8% 3.1% 3.2%

1-year liquidity premium

0 0.5% 0.6%

What would the yield to maturity be on a two-year zero-coupon bond purchased today?

a.

3.2%

b.

3.6%

c.

3.1%

d.

2.95%

e.

None of the above

Question19

What is the price at the beginning of year 1 (today) of a 5% annual coupon bond with face value $1,000 and 3 years to maturity?

a.

1055.60

b.

1045.40

c.

1066.33

d.

1055.78

e.

None of the above

Question20

What should be the price of a two-year coupon bond when it is issued, if the bond is issued in one year, it pays 5% annual coupons, and has a face value of $1,000?

a.

1024.67

b.

1035.35

c.

1046.19

d.

1038.22

e.

None of the above

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