4) Suppose the current 1-year (short term) interest rate is 8 percent and that markets expect the 1-year (short-term) interest rate will be 12 percent one year from now. (15 points) a) Draw a yield curve covering terms to maturity ranging from 1 to 2 years according to the expectations theory of the term structure. Calculate (show your formulas and work) the current 2-year interest rate. Clearly indicate on a drawn yield curve what the current 1-year and current 2-year bond yields are. b) Now assume that the liquidity premium theory holds. Draw a plausible yield curve along with the yield curve in case (a). Assuming that the liquidity premium theory is correct, what would likely happen if investors became less risk averse? Illustrate this. 4) Suppose the current 1-year (short term) interest rate is 8 percent and that markets expect the 1-year (short-term) interest rate will be 12 percent one year from now. (15 points) a) Draw a yield curve covering terms to maturity ranging from 1 to 2 years according to the expectations theory of the term structure. Calculate (show your formulas and work) the current 2-year interest rate. Clearly indicate on a drawn yield curve what the current 1-year and current 2-year bond yields are. b) Now assume that the liquidity premium theory holds. Draw a plausible yield curve along with the yield curve in case (a). Assuming that the liquidity premium theory is correct, what would likely happen if investors became less risk averse? Illustrate this