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In: Economics

2. Suppose that the current and expected future short-term interest rates are given by: it =...

2. Suppose that the current and expected future short-term interest rates are given by: it = 0:05 ie t+3 = 0:03 ie t+1 = 0:05 ie t+4 = 0:03 ie t+2 = 0:04 And suppose that the liquidity premiums on bonds with maturity on 1 through 3 years are: l1t = 0:00 l4t = 0:02 l2t = 0:01 l5t = 0:025 l3t = 0:015 (a) Find the yields on the 2-, 3-, 4-, and 5-year bonds implied by the expectations theory. (b) Find the yields on the 2-, 3-, 4-, and 5-year bonds implied by the liquidity premium theory. (c) Plot the yield curves that are implied by the expectations and liquidity preference theories.

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Rahul Sunny answered 10 months ago
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