7.Suppose that the price of a T-bill maturing one year from now is 950. Suppose also that the two-years interest rate is 6%, the three-years interest rate is 6.5% and the four-years interest rate is 6.8%. You are considering two investment strategies for four years. The first is by investing in T-bills and each year rolling over your money for one year until four years from now. The second is buying a 4-years to maturity, coupon rate 4%, paid once a year, and par 1000, and reinvesting the coupon for one year at a time.

a.What are the expected realized yields on each of the two strategies if you believe in the expectations hypothesis.

b.What will be the realized yields if it turns out that in 8-months from now the yield curve will become flat at 3% and will stay that way until four years from now?