On January 7, 2022, the Wall Street Journal reported the following rates for Treasury bonds:

10-year bond rate =1.70%; 20-year bond rate = 2.11%

a. Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

Expected 10-year Treasury bond rate 10 years from now = _________________ (Be sure to show your work here).

Rate are expected to ___________ because ________________________

b. For the same above suppose there is a liquidity premium of 0.10% for a 20-year bond and 0.05% for a 10-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why and why the expected rate under the liquidity premium theory differs from that of the expectations theory.

Expected Rate with LP __________ Rates Expected to __________________ (Be sure to show your work here).

b. Briefly explain the market segmentation theory. Suppose there is a federal deficit increasing the demand for loanable funds, and 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 based on the segmentation theory. What is a weaknesses for this theory?