The yield to maturity on one-year zero-coupon bonds is 7%. The yield to maturity on two-year zero-coupon bonds is 8%.

a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Forward rate of interest %

b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Short-term interest rate %

c. If you believe in the liquidity preference theory, is your best guess as to next years short-term interest rate higher or lower than in (b)?

	Higher
	Lower

The yield to maturity on one-year zero-coupon bonds is 7% The yield to maturity on two-year zero-coupon bonds 8% a. What is the torward rate or interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Short-term interest rate C. If you believe in the liquidity preference theory, IS your best guess as to next years short-term interest rate higher or lower than n )? Higher Lower