[Solved] Assignment 219461

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Assignment Details

Subject: Business    / Finance
Question
In the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds with an upward sloping yield curve:
6 year bond rate = 3%; 3 year bond rate = 2%
Under the expectations theory, what is the expected 3-year bond rate 3 years from now?
Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why
Also, under the liquidity premium theory, if there is a liquidity premium of 0.50% for a 6-year bond and 0.25% for a 3 year bond, what is the new expected 3-year bond rate 3 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why.

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