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Unformatted text preview: Homework #2 Economics 350 Fall 2009 Xi Chen Name: Due: Friday, Oct.30 in class ID(000): Total Points: 50 Class: Question 1. (9 pts) Suppose that the preferred habitat theory of term structure is correct. Suppose further that expected 1year interest rates are: 20092010 20102011 20112012 20122013 20132014 4% 8% 15% 7% 1% Suppose further still that in 2009, the liquidity premium on a 2year bond is 0.25 percent, the liquidity premium on a 3year bond is 0.5 percent, the liquidity premium on a 4year bond is 0.8 percent, the liquidity premium on a 5year bond is 1.03 percent. Then in 2009, the interest rate on a 2year bond is ___ percent, the interest rate on a 3year bond is ___ percent, the interest rate on a 4year bond is ___ percent, the interest rate on a 5year bond is ___ percent. Labeling the points, plot the yield curve for the next five years. Question 2. (9 points): Answer question 11, 13 and 15 from Chapter 6 in your textbook. Although it is not necessary, you might find it useful to set up supplydemand diagrams like the one on page 129 of your...
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This note was uploaded on 12/12/2009 for the course ECO 350 taught by Professor Chen during the Fall '09 term at SUNY Albany.
 Fall '09
 Chen
 Interest Rates

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