JRossSter

@Nep-hi: okay now we may be getting somewhere
You state that “They want to know the underlying curve rates, you have to strip way the premiums. The rates they gave you include both the real interest rates and the premiums for liquidity/preference.” However the figure with the rates given in the question is clearly labeled as the current and prior year SPOT RATE CURVE (this means we can use these rates to construct a curve). The questions go on to ask “…which of the following statements best explains the current/prior year SPOT RATE CURVE.” Note it refers particularly to the spot rates that are given and that can be used to construct the sport rate curve which the question is subsequently asking you to analyze, not the “real rates” that you refer to as the rates given less the included premiums! This argument is crucial for everything that follows for obvious reasons.
You say “You have to look at the underlying premium for the liquidity risk” how? I don’t know what this risk premium is.
Also you say “The spread is where they are coming up with the negative slope at the tail.” The spread over what?
For Q47 you say “. The liquidity premium will be higher for longer term maturities. This means the real interest rate had to go down” why did it have to go down? The one year rate a year ago and the one year rate today are the same, if anything that tells me that the 1 year liquidity premium for both has stayed the same.
For Q48 see my first reference to your comments above where I talk about the spot rate curve, and not the “real rate” curve that you mention. Where do you find/see or how do you conclude that all real rates are the same as last year? This seems like a somewhat unreasonable assumption.
Looking forward to the discussion

JRossSter

Obviously I have not done a good job. Maybe somebody can explain it in a better way. The spot rate is whatever the security is trading for today. It would seem to me that that would mean that is the total rate with all the premium/discounts included for someone to buy/sell on. It’s the current price/rate today.
Looking from this direction, the answers make sense, backwards induction. Can somebody come up with a diff way to make the answer match the data given?