Suppose there are 3 bonds with the following characteristics. There is a 1-year Treasury bond with a face value of $1000, a 8% coupon rate, and the yield to maturity is 8%. There is a 2-year treasury bond with a face value of $1000, a 15% coupon rate, and the yield to maturity is 8%. There is also a 3-year treasury bond with $1000 face value, a 5% coupon rate, and the yield to maturity is 8%.

a)Based on expectations theory, what is the expected 1-year interest rate next year and what is the expected 1-year interest rate 2-years fromnow?

b)What is the shape of the yield curve right based on thesebonds?

c)What does expectations theory predict should happen to short-term and long-terminterest rates based on the information from these bonds?

d)Briefly explain, does your answers from part a) fit with the answer to partc)?