Two analysts are considering the path of interest rates going forward. Analyst A believes the pure expectations theory of yield curves, while Analyst B believes the liquidity preference theory.

They both construct a yield curve based on spot rates. The yield curve is flat for the zero to 5-year maturities.

(i)Would both analysts derive the same conclusions concerning market expectations about interest rates? If so why, if not, why not? (2marks)

(ii)What would both conclude about the market's belief concerning the path interest rates over the next 5 years? (2 marks)

(iii) Assume both analysts are managing bond portfolios.How might their views about rates going forward affect bond portfolio decisions? (2 marks)