Problem 1 ( 10 points) Suppose that a 1year zero-coupon bond with face value $l sells at $940, and a 2-year zero sells at $865 with same amount of face value. You are considering to purchase a 2year rnaturity bond making annual coupon payments. The face value of the bond is $lllil= with coupon rate at 10%. (a) |Compute the forward rate for the second year f2. Hint: what are the value of m and m? {b} Under the expectations hypothesis, oornpute the {expected} holding period return on the coupon bond over the rst year? Hint: What is the coupon bond price as the starting price? What is the selling price of this coupon bond at the end of first year as the ending price? {c} Now, suppose that the liquidity preference theory is valid in the market, will the (ex pected} holding period return he higher or lower? Explain it