According to liquidity premium theory of the term structure

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20-year riskless zero-coupon bonds (say, pure discount U.S. Treasury bonds) are currently yielding 9% to maturity and similar five-year bonds are now yielding 10% to maturity.

1. What is the implied forward rate on a 15-year bond which will start at the end of year 5?

2. According to the liquidity premium theory of the term structure, what is expected rate on a 15-year bond at the end of year 5?

3. How could you lock the 15-year borrowing rate starting at the end of year 5?

Reference no: EM131448491

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