One year T-bills presently pay 5.5% interest, two year T-notes pay 6% and three year T-notes pay 6.4%.

a. Draw a graph of the yield curve with both axis labeled. Is this the normal shape of the yield curve or not? What theory of the yield curve is consistent with this shape? What is the basic idea of this theory?

b. What is the expected one year T-bill rate a year from now (1-year forward rate)?

c. What is the expected one year T-bill rate two year from now (2-year forward rate)?

d. What is the name of the theory of the yield curve that you are using to answer these questions in b and c, and what is the basic idea of this theory?