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QUES 1. The 1-year rate is currently 3%, and the expected 1-year rate a year from now is 1%. If the liquidity preference theory holds
QUES 1. The 1-year rate is currently 3%, and the expected 1-year rate a year from now is 1%. If the liquidity preference theory holds and the liquidity premium for the 2-year rate is 0.6%, what should the 2-year rate be? (Assume that the liquidity premium for the 1-year rate is 0.0%) QUES 2. If the 1-year rate is currently 3%, and the 2-year rate is 4.5%, what is the expected 1-year rate a year from now if the liquidity preference theory holds and the liquidity premium for the 2-year rate is 0.5%? (Assume that the liquidity premium for the 1-year rate is 0.0%) QUES 3. Suppose you observe that the YTM on a l-year zero-coupon bond is 5%, and the YTM on a 2-year zero-coupon bond is 6%. The YTM on a 2-year annual coupon bond with a 12% coupon rate is 5.8%. Assume all three bonds are riskless. If you were to repackage the 2-year coupon bond as two zero-coupon bonds, how much should you be able to sell them for
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