Finance Assignment | Professional Writing
Exercise 4. Consider a mean-variance optimizer that wants to invest in bonds for two periods. In order for them to be indifferent between a two year bond and rolling over two one year bonds, what must the liquidity premium equal?
What if they want to invest in N periods and are indifferent between an N period bond and an N – 1 period bond rolled over into a one period bond? What must the liquidity premium equal then?