Risk-free zero-coupon government bonds have the following terms and yields to maturity

Term to Maturity 1 year 2 years 3 years 4 years 5 years

Yield to Maturity 3.2% 3.7% 4.5% 4.1% 3.9%

(a.) Find the market prices for each of the bonds given a par value of $1000.

(b.) Calculate the implied forward rates for all five years.

(c.) Draw the yield curve and the forward rate curve in one diagram.

(d.) Under the liquidity preference hypothesis of the term structure, suppose that liquidity premiums are expected to remain constant at 1%. What are the expected short rates in year 2 to year 5