Suppose in the Wall Street Journal you see the following current (spot) interest rates for Treasury bonds on January 7, 2021 with an upward sloping yield curve: 10-year bond rate =1.08%; 20-year bond rate = 1.64%

a. Under the expectations theory, what is the expected 10-year bond rate (forward rate) 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why

Expected 10-year bond rate 10 years from now = _________________ (Be sure to show your work here).

Rate are expected to ___________ because ________________________

b. For the same above if there is a liquidity premium of 0.08% for a 10-year bond and 0.20% for a 20-year bond, under the liquidity premium theory (adjusting for liquidity premiums incorporated in bond rates) what is the new expected 10-year bond rate 10 years from now? Based on your answer, what are rates expected to do (rise/fall/stay the same)? Explain why. Expected Rate with LP __________ Rates Expected to __________________ (Be sure to show your work here).

c. Explain how interest rates are determined under the market segmentation theory What is the flaw in this theory?