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What does the liquidity preferences framework suggest about the bond market and the money market? Explain. We can write the general return of a bond
What does the liquidity preferences framework suggest about the bond market and the money market? Explain.
We can write the general return of a bond as R=i_c+g. What does this equation tell us? Explain.
The table below shows the expected interest and our short term preference on shorter term bonds. What are the interest rates on 2, 3, and 4 year bonds using the liquidity premium framework? What would the yield curve look like if you could plot it?
Year | Expected interest rate | Short term preference |
---|---|---|
1 | 2 | |
2 | 3 | 0.075 |
3 | 4 | 0.1 |
4 | 3 | 0.125 |
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