Assume the yields to maturity of one-year and two-year zero coupon bonds are 2% and 3%, respectively. The Treasury plans to issue a two-year maturity coupon bond, with a coupon rate of 4%, annually paid. The par value of the bond is $1,000.

a) At what price will the coupon bond sell ?

b) What is going to be the coupon bonds yield to maturity ?

c) Assuming the expectations hypothesis, what is the coupon bonds expected price next year (right after the receipt of the first coupon)?

d) How would you answer part (c) assuming a constant liquidity premium of 1% ?