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Forward rate Suppose that, because of unexpected changes in the economy, the default risk premium increases to 0.8 percent. Assuming that no other changes occur,

Forward rate
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Suppose that, because of unexpected changes in the economy, the default risk premium increases to 0.8 percent. Assuming that no other changes occur, what is the appropriate yield to be offered on the commercial paper? Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium. Explain the relationship between the one-year interest rate and the one-year forward rate while holding the two-year interest rate constant. Suppose that, because of unexpected changes in the economy, the default risk premium increases to 0.8 percent. Assuming that no other changes occur, what is the appropriate yield to be offered on the commercial paper? Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium. Explain the relationship between the one-year interest rate and the one-year forward rate while holding the two-year interest rate constant

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