On January 17, 2018, the U.S. Treasury Resource Center for interest rates reports the following current (spot) Treasury bond rates:

5-year bond rate = 2.25% and

10-year bond rate = 2.46%

1. Suppose there is a liquidity premium of 0.20% for a 10-year bond and 0.10% for a 5-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates)

(a) What is the new expected 5-year bond rate 5 years from now?

2. Suppose the U.S. Treasury issues a large quantity of long-term 10-year Treasury bonds, under the market segmentation theory, what would be the effect of this issue on respectively short-term and long-term interest rates? Explain why.