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What is the rate on 1-5 year bonds

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If over the next five years, the interest rates on 1-year bonds are expected to be 5%, 6%, 7%, 6%, and 5%, and the liquidity premium for 2-5 year bonds is 0.5%, 0.75%, 1.25%, and 2% respectively. According to the expectations theory of the term structure, what is the rate on 1-5 year bonds? According to the liquidity premium theory, what is the rate on 1-5 year bonds? Explain the difference between these two different theories.

Reference no: EM132817961

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