5. Module 2: Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on July 16,, 2021 with an upward sloping yield curve:

10-year bond rate =1.31%; 20-year bond rate = 1.86%

a. Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

Expected 10-year bond rate 10 years from now = _________________

(Be sure to show your work here).

Rate are expected to ___________ because ________________________

b. For the same above if there is a liquidity premium of 0.25% for a 10-year bond and 0.50% for a 20-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why.

Expected Rate with LP __________ Rates Expected to __________________

(Be sure to show your work here).

c. Explain how interest rates are determined under the market segmentation theory for respectively short-term and long-term interest rates. What is the flaw in this theory?