Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $88.64, while a 2-year zero sells at $78.45. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 6% per year.

a.	What is the yield to maturity of the 2-year zero? The 2-year coupon bond? (Do not round intermediate calculations. Round your answers to 3 decimal places. Omit the "%" sign in your response.)

	Yield to Maturity
2-year zero	%
2-year coupon bond	%

b.	What is the forward rate for the second year? (Do not round intermediate calculations and rounded to whole number. Omit the "%" sign in your response.)

Forward rate

%

c.

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? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" & "%" signs in your response.)

Expected price	$
Holding-period return	%

d.

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

	Higher
	Lower