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Question 3 : Suppose we observe the following rates: 1 r 1 = 3 %, 1 r 2 = 5 %, and E ( 2

Question 3:

Suppose we observe the following rates: 1r1 = 3%, 1r2 = 5%, and E(2r1) = 6%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?

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