Suppose that a 1-year zero-coupon bond with a face value of $100 currently trades at $95, while a 2-year zero trades at $86.

a) What is the forward rate for the second year (i.e., the rate from t = 1 to t = 2; note: today is t=0).

b) If the expectations hypothesis is accepted, what are: (1) the expected price of the coupon bond at the end of the first year, and (2) the expected holding period return on the coupon bond over the first year)?

c) Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?