Question 17 5 pts Assume that the Liquidity Preference Theory of the term structure is...
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Question 17 5 pts Assume that the Liquidity Preference Theory of the term structure is correct and that you expect the annual real rate of return to be constant over at least the next 10 years at 2.00 percent, that you expect average annual inflation to be 3.0 percent each year for the next 3 years (Years 1 - 3), but then, because of government spending and the effect of the federal stimulus package, to jump to 5.0 percent for years 4-8. Also assume that the maturity risk premium can be defined as (0.15%)*(t-1) and that the yield on a 10-year corporate security is 9.45 percent, which includes a liquidity premium of 0.40 percent and a default risk premium of 1.50 percent. Given this information, determine the average annual return on a 4-year corporate security to be bought at Year 7 and held over Years 7, 8, 9 and 10, if the liquidity premium on this security will be 0.30 percent and the default premium will be 0.95 percent. Answer in decimal format, to 4 decimal places. For example, if your answer is 25.22%, enter "0.2522". Note that Canvas will delete trailing zeros, if entered
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