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solve question 1 and 2 please
2. According to the Market Segmentation Theory (MST), what can you conclude about the 2-year and 5-year Treasuries according

i mean 2 and 3
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Answer #1

2. Market segmentation theory believes that short term and long term interest rates are not dependent on each other and move as per the demand- supply forces for each duration category. Hence the 2 year yields which are close to 6% and the 5 year yields which are close to 2% have no relationship or dependence on each other and are determined purely on the supply- demand.

3-Liquidity premium hypothesis states that the interest rate for year 4= Geometric mean ( GM) of ( Interest rate 3 years and the expected 1 year interest rate for year 4) + Liquidity premium.

So 8.7% = GM of 7.25% and 9.25% + Liquidity premium

8.7%= 8.24% + Liquidity premium , so liquidity premium = 0.46%

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