Assume the following interest rates
Current Rate on a 1-year bond due in 2023: 5%
Expected Rate on a 1-year bond due in 2024: 7%
Expected Rate on a 1-year bond due in 2025: 8%
Expected Rate on a 1-year bond due in 2026: 8%
Expected Rate on a 1-year bond due in 2027: 9%
a. According to the expectations theory for the yield curve, what would be the current rate on a 3-year bond due in 2025? Show work.
b. According to the expectations theory for the yield curve, what would be the current rate on a 5-year bond due in 2027? Show work.
c. Graph and explain the yield curve. Explain how and why it might be upward sloping and when it might be downward sloping. Explain.
d. How might the liquidity preference theory change your results? Explain.
e. How might risk premiums change your results? Explain.