Consider two $1000 par treasury bonds that are zero-coupon: (i) a 1-year bond with a yield to maturity of 4%; (ii) a 2-year bond with a yield to maturity of 5%.

8. The yield curve is:

A) Upward sloping

B) Downward sloping

C) Flat

9. What is the 1-year forward rate (f1,2) based on the expectations model? In other words, what is the expected 1-year rate starting in one year from now and going one year? (to the nearest whole percent)

A) 1%

B) 3%

C) 4%

D) 5%

E) 6%