Suppose the liquidity premium is constant at 2%, and expected future interest rates (i.e., E[r2],...
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Suppose the liquidity premium is constant at 2%, and expected future interest rates (i.e., E[r2], E[r3], etc) are constant at 1%. The yield on a one year bond today y1 is also 1%. Calculate the forward rates f2 and f3. Then use those to calculate the 2- and 3-year yields, y2 and y3.
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