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Suppose that the one year interest rate over the next five years is expected to be 1.5%, 2%, 3%, 5%, and 6%, while investors preferences
Suppose that the one year interest rate over the next five years is expected to be 1.5%, 2%, 3%, 5%, and 6%, while investors preferences for holding short-term bonds means that the liquidity premiums for one- to five-year bonds are 0%, 0.02%, 0.05%, 0.15%, and 0.2% respectively. Using the liquidity premium theory, calculate the one- to five-year interest rates and plot the resulting yield curve.
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