YIELD CURVE FOR ZERO-COUPON BONDS RATED AA

Maturity	YTM	Maturity	YTM	Maturity	YTM
1 year	8.00%	7 year	9.15%	13 year	10.45%
2 year	8.11%	8 year	9.25%	14 year	10.65%
3 year	8.20%	9 year	9.35%	15 year	10.75%
4 year	8.50%	10 year	9.47%	16 year	10.95%
5 year	8.75%	11 year	9.52%	17 year	11.00%
6 year	8.85%	12 year	9.77%	18 year	11.25%

Assume that there are no liquidity premiums. You just bought a 15-year maturity Xerox corporate bond rated AA with a zero percent coupon. You expect to sell the bond in eight years. Find the expected interest rate at the time of sale.Multiple Choice

13.92%

11.00%

8.85%

12.49%

12.80%

According to the liquidity premium theory of interest rates:

Multiple Choice

long-term spot rates are higher than the average of current and expected future short-term rates.

investors prefer certain maturities and will not normally switch out of those maturities.

investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates.

the term structure must always be upward sloping.

long-term spot rates are totally unrelated to expectations of future short-term rates.