Question: The current 1-year bond and 2-year bond interest rate are both 4% . i) According to expectation theory, what will be the interest rate of

The current 1-year bond and 2-year bond interest rate are both 4% .

i) According to expectation theory, what will be the interest rate of one-year bond next year?

ii) Suppose the term premium is 0% for this year and 1% for next year. According to liquidity premium theory, what will be the interest rate of one-year bond of next year?

iii) Plot the yield curve in i) and ii).

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