2. Suppose that 1. The interest on a one-year bond today is 3%;

2. The interest on a one-year bond starting one year from now is expected to be 4% per year;

3. The interest on a one-year bond starting two years from now is expected to be 5% per year;

4. The risk premium on a two-year bond is 0.5%;

and 5. The risk premium on a three-year bond is 1.0%.

Use this information to answer the following questions:

a. According to the expectations theory, what is the interest rate today on a two-year bond? Show your work.

b. According to the expectations theory, what is the interest rate today on a three-year bond? Show your work.

c. Plot the yield curve.