《《Investment 8th Chap015》.docVIP

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS. 1. In general, the forward rate can be viewed as the sum of the market’s expectation of the future short rate plus a potential risk (or ‘liquidity’) premium. According to the expectations theory of the term structure of interest rates, the liquidity premium is zero so that the forward rate is equal to the market’s expectation of the future short rate. Therefore, the market’s expectation of future short rates (i.e., forward rates) can be derived from the yield curve, and there is no risk premium for longer maturities. The liquidity