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Suppose you invest for one year. You consider buying a 3-year zero coupon bond and selling it after one year, or a 5% coupon bond
Suppose you invest for one year. You consider buying a 3-year zero coupon bond and selling it after one year, or a 5% coupon bond for 3 years, coupons paid once a year and selling it after one year The 1-year interest rate is 2%. The forward rate1f3 is 2.5%. The forward rate 1f2 is 2.25%
Under the liquidity preference theory, assuming that the liquidity risk premium (LPR) on a 2-year zero bond is 0.3%, is the 1 -year interest rate expected to rise or fall next year?
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