Liquidity premium on the two year bond

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Suppose that the yield curve for government bonds shows that the one year bond yield is 2%, the two year yield is 5%, and the three year yield is 7%. Assume that the liquidity (term) premium on the one year bond is 0%, the liquidity premium on the two year bond is 1%, and the liquidity premium on the three year bond is 1.5%.

What are the expected one year interest rates next year and the following year? Briefly explain.

Reference no: EM132229410

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