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The Risk and Term Structure of Interest Rates
The Risk and Term Structure of Interest Rates
For an investment of $1
it = today's interest rate on a one-period bond
ite+1 = interest rate on a one-period bond expected for next period
i2t = today's interest rate on the two-period bond
e e e
it + it+1 + it+2 + ...+ it+( n1)
int = + lnt
n
where lnt is the liquidity premium for the n-period bond at time t
lnt is always positive
Rises with the term to maturity