Assume that the liquidity preference hypothesis holds and use the following table to answernext 3 questions

Year from today

1-Year Forward Rate

1-year liquidity premium

Year from today: 1

1-Year Forward Rate: 2.8%

1-year liquidity premium: 0

Year from today: 2

1-Year Forward Rate: 3.1%

1-year liquidity premium: 0.5%

Year from today: 3

1-Year Forward Rate: 3.2%

1-year liquidity premium: 0.6%

What would the yield to maturity be on a two-year zero-coupon bond purchased today?

a. 3.2%

b. 3.6%

c. 3.1%

d.2.95%

e. None of the above

What is the price at the beginning of year 1 (today) of a 5% annual coupon bond with face value $1,000 and 3 years to maturity?

a. 1055.60

b. 1045.40

c. 1066.33

d. 1055.78

e. None of the above

What should be the price of a two-year coupon bond when it is issued, if the bond is issued in one year, it pays 5% annual coupons, and has a face value of $1,000?

a. 1024.67

b. 1035.35

c. 1046.19

d. 1038.22

e. None of the above