Question 1 (10 marks) Government economists have forecasted one-year T-bill rates for the following five years as follows: Year 1-year rate I 4.25% 2 5.15% 3 5.50% 4 6.25% 5 7.10% You have liquidity premium 0.25% for the next two years and 0.50% thereafter. (a) What will be the interest rates on 3-year bond, 4 year bond, and 5-year bond? (b) Would you be willing to purchase a 4-year T-bond at a 5.85% interest rate? Explain your answer. Question 2 (14 marks) Which one of the following statements about the term structure of interest rates is true? Also, explain why the other statements are false? a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates. b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate. c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields. d. Market Segmentation Theory assumes that the yield curve is determined by supply and demand for debt instruments of different maturities.