Assume that the one-year spot rate is 2% (k1=2%) and the expected future spot rate is 3.01% (E(k1) = 3.01%). Investors dont like long-term investments, so the two-year bond yield includes a maturity risk premium of 1%. Answer the questions that follow.

Part 1 What two-year spot rate is consistent with these values under the maturity preference hypothesis?

Responses:

2.50%

3.01%

3.00%

3.50%

Part 2 Using the two-year spot rate from Part 1, calculate the forward rate. The resulting forward rate is _______ the expected future spot rate.

Responses:

larger than

the same as

smaller than