c. Determine how the one-year forward rate would be affected if the quoted two-year interest rate...

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c. Determine how the one-year forward rate would be affected if the quoted two-year interest rate rises; hold constant the quoted one-year interest rate as well as the liquidity premium. Explain the logic of this relationship.

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By holding the one, and two-year interest rates constant, the forward rate is decreased for increased amounts of liquidity premium.The increased levels of liquidity premium increase the amount of the interest rate variance.

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