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Maturity (years Yield Forward Rate 1 1.25 --- 2 S 2 = 1.88 2.0516 3 2.25 f 3 =2.994 4 S 4 =2.85 4.6712 Suppose
| Maturity (years | Yield | Forward Rate |
| 1 | 1.25 | --- |
| 2 | S2= 1.88 | 2.0516 |
| 3 | 2.25 | f3=2.994 |
| 4 | S4=2.85 | 4.6712 |
Suppose that the observed spot yield curve and implied forward rates for risk-free zero coupon bonds are as given above.
A. Compute the spot rate and forward rates that complete the table. -- I already did this! I computed S2, f3, and S4.
B. Suppose you observe the spot rates in the table above. What can you say about investors' expectations for future interest rates based on th liquidity premium theory? --This is what I need help with!
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