Liquidity premium theory: Some possible shapes • Consider the current interest rate of 5% and the following one-year interest rates expected to arise over the next four years: 6%, 7%, 8% and 9%. •...

Extracted text: Liquidity premium theory: Some possible shapes • Consider the current interest rate of 5% and the following one-year interest rates expected to arise over the next four years: 6%, 7%, 8% and 9%. • Assume that investors have a preference for holding short-term bonds, and as such charge the following liquidity premia for one to five bonds: 0%, 0.25%, 0.5%, 0.75% and 1.0% year Question: Calculate the interest rate on bonds with one to year maturities based on the liquidity premium theory. five