1. The yield to maturity on zero-coupon bonds with one-year maturity is 7%, the yield to maturity on zero-coupon bonds with two-year maturity is 9%, and the yield to maturity on zero-coupon bonds with three-year maturity is 11%. The zero-coupon bonds have no default risk. Assume the liquidity preference theory of the term structure is correct. The liquidity premium in year 2 is 2%, and the liquidity premium in year 3 is 4%. Given the information, the expected short rate for year 2 is around___________ than the expected short rate for year 3.

1. 1.46% lower
2. 2.07% lower
3. 2.11% higher

d.1.47% higher

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