1. Over the next three years, investors expect the one-year real interest rate to take the following values:

Year 1 (months 1 to 12) = 1.7%

Year 2 (months 13 to 24) = 1.5%

Year 3 (months 25 to 36) = 1.5%

And, the expected annual inflation rates in each of the next three years are:

Year 1 (months 1 to 12) = 2%

Year 2 (months 13 to 24) = 2%

Year 3 (months 25 to 36) = 3%

A. What is the quoted annual rate (from the geometric mean calculation)?

i. a one-year loan

ii.a two-year loan

iii. a three-year loan

B. What is the shape of the yeild curve and is this possible according to the liquidity theory or the expectations theory?