Hands-on Experience: Actual Yield Curve as of 02/10/2012 (in percentages)

Date	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
2/10/2012	0.15	0.27	0.36	0.81	1.36	1.96	2.75	3.11

a) According to the expectations theory, what is the one-year rate one-year from now? (10 points)

b) According to the expectations theory, what is the two-year rate five years from now? (10 points)

c) Assume that the annualized liquidity premium on a 1-yr bond and 2-yr bond are 0% and 0.12%, respectively. According to the liquidity premium theory, what is the one-year rate one-year from now? (10 points)

d) Compare your findings in (a) and (c). Why are they different? (5 points)