The yield to maturity on one-year zero-coupon bonds is 8.1%. The yield to maturity on two-year zero-coupon bonds is 9.1%.

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

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.)

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

• Higher
• Lower