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Question 5. Suppose the yield on a one year bond is 4%, the yield on a two year bond is 5%, and the yield on
Question 5. Suppose the yield on a one year bond is 4%, the yield on a two year bond is 5%, and the yield on a three year bond is 7%. The liquidity premium is constant at 1%. What is the expected return on the three-year) investment strategy of rolling over three consecutive one year bonds (i.e., buying a one year bond, then buying a new one year bond with the payoff next year, etc.)
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