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Suppose Lisa is an investor who considers whether to buy a 2-year bond today or a 1-year bond today and, after one year, buy a
Suppose Lisa is an investor who considers whether to buy a 2-year bond today or a 1-year bond today and, after one year, buy a second 1-year bond using the proceeds from the first bond. Suppose that the interest rate data for two years are publicly available and accurate, and that Lisa not only cares about the return on investment, but also about the risk associated with long-term investments. Complete the following table by calculating the term premium on a 2-year bond. Which of the following is implied by the term premium you just calculated? Lisa values longer-term investment more because it yields a higher return than short-term investment. The increased riskiness of longer-term investment is more important to Lisa than the impact of lower transaction costs and reduced uncertainty on longer-term investment. Lisa values reduced uncertainty on long-term bonds more than higher volatility of short-term bonds. Which of the following general statements about the term premium are true? Check all that apply. The term premium is negative if the risk associated with long-term bonds is greater than the impact of lower transactions costs and uncertainty on long-term bonds relative to short-term bonds. If there were no term premium, the interest rates would be the same on average. The term premium changes over time depending on the amount of interest rate risk. The term premium changes over time depending on the present values of bonds
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