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IL The current interest rate of the one-year bond is 5%. Financial market analysts made their estimates about short-term interest rates for the foreseeable future.

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IL The current interest rate of the one-year bond is 5%. Financial market analysts made their estimates about short-term interest rates for the foreseeable future. They project that the yields of the one-year bond two, three, four, five, and six years from now are 5.25%, 5.5%, 5.75%, 6%, and 6.25%, respectively. They also observe that the interest rates of the one-, two-, three-, four-, five-, and six-year bonds are 5%, 5.5%,6%, 6.5%, 7%, and 8%, respectively. A. (6 points) Calculate the liquidity premiums for the one-, two-, three-, four-, five-, and six-year bonds. B. (4 points) Graph the corresponding yield curve of the bond market. C. (3 points) Projections about economic strength has lowered the forecasted short- term interest rates by one full percentage point. This change applies for the short- term bonds projected for a year from now to six years from now. Using the liquidity premiums you calculated in part (a), calculate the new values of the long-term interest rates. D. (2 points) Demonstrate the change in the yield curve following the events in part (c). IL The current interest rate of the one-year bond is 5%. Financial market analysts made their estimates about short-term interest rates for the foreseeable future. They project that the yields of the one-year bond two, three, four, five, and six years from now are 5.25%, 5.5%, 5.75%, 6%, and 6.25%, respectively. They also observe that the interest rates of the one-, two-, three-, four-, five-, and six-year bonds are 5%, 5.5%,6%, 6.5%, 7%, and 8%, respectively. A. (6 points) Calculate the liquidity premiums for the one-, two-, three-, four-, five-, and six-year bonds. B. (4 points) Graph the corresponding yield curve of the bond market. C. (3 points) Projections about economic strength has lowered the forecasted short- term interest rates by one full percentage point. This change applies for the short- term bonds projected for a year from now to six years from now. Using the liquidity premiums you calculated in part (a), calculate the new values of the long-term interest rates. D. (2 points) Demonstrate the change in the yield curve following the events in part (c)

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