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Let's suppose that the one-year interest rate over the next ve years is expected to be 2.00%, 2.5%, 3.00%, 3.25%, and 4.00%. Investors' preferences for
Let's suppose that the one-year interest rate over the next ve years is expected to be 2.00%, 2.5%, 3.00%, 3.25%, and 4.00%. Investors' preferences for holding short-term bonds have the liquidity premiums for one-year to ve-year bonds as 0%, 0.1%, 0.25%, 0.35%, and 0.5%, respectively. What is the interest rate on a two-year bond, three-year bond and a ve-year bond based on UET? Compare these ndings with the answer from rates based on LPT.
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