Assuming that the liquidity preference theory

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A two-year bond carries a 6% annual rate, while a three-year bond carries 9% annual rate. (a) What is the expected one-year rate for year 3, assuming the Expectations theory for the term structure of interest rates? (5 points) (b) What is the expected one-year rate for year 3, assuming that the liquidity preference theory is also true and that the liquidity premium of long-term over short-term is 1%? (3 points) (c) Is it reasonable to assume a constant liquidity premium? Why or why not?

Reference no: EM13795049

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