Q$2.$b$)$ Explain why the

segmented markets

hypothesis and the

expectations

hypothesis are the

extreme cases of the

preferred habitat

hypothesis. How does

each theory explain the

shape of yield curves? Investors prefer one

year bonds to three

year bonds and will buy

a three year bond only

if they receive a term

premium of $4\%.$

Currently one year

bonds yield $5\%$

But investors expect

this yield to rise to

$7\%$ next year. $9\%$ year

after i$)$Find

The yield on a three

year bond

ii$)$The shape of the

yield curve