Determine the risk structure of interest rates

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Reference no: EM132071448

1. Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.

2. Suppose the liquidity premium is 0.4%, and the one-year Canada bond rate is 8% and two-year Canada bond rate is 10%. Please calculate the forward rate iet+1. [5 marks] (Hint: Using the method showed in Application-Forward Rate in the textbook)

Reference no: EM132071448

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