C. Based on the yield curve of U.S. Treasuries on 12th November, 2021, answer the questions below.

(1) What is the market predicting about the movement of future short-term interest rates? [6 marks]

(2) What might the yield curve indicate about the markets predictions concerning the inflation rate in the future? [6 marks]

(3) Explain, according to the liquidity premium theory, why longer-term U.S. Treasury Securities tend to have higher yields. [6 marks]

Yield Curve for U.S. Treasuries on 12th November 2021 2.5 2. 2 1.5 % Yields 1 0.5 0 1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr