1. Using the Market Segmentation Theory, outline the impacts on the term structure of interest rates of the following cases:

1. Economic Recession
2. Economic Expansion
3. Expansionary open market operation in which the Central Bank buys S-T Treasuries.
4. Treasury sale of long-term Treasury bonds.
5. Treasury purchase of long-term Treasury bonds

1. Explain Expectations Theory intuitively and with an example. In your example assume a flat yield curve with one- and two-year bonds at 6% and an expectation of next year's yield curve being flat with one- and two-year bonds at 8%. Explain the theory only in terms of the response to the expectation by investors with one-year and two-year horizon dates.

1. Given the following spot yield curve:

Maturity	YTM
1 Year 2 Years 3 Years 4 Years	6.0% 6.5% 7.0% 7.5%

1. What is the equilibrium price of a four-year, 7% annual coupon bond paying a principal of $100 at maturity?
2. Using implied forward rates estimate the yield curve one year from the present (1-year, 2-year, and 3-year spot rates).
3. What is the expected equilibrium price one year from now of a three-year, 7% annual coupon bond paying a principal of $100 at maturity?
4. What is the one-year expected rate of return from investing in the four-year, 7% coupon bond if your expectations were based on implied forward rates?
5. Using implied forward rates estimate the yields for 1-year and 2-year spot rate two years from now.
6. Show that the expected rate from holding the four-year, 7% coupon bond for two years is equal to the 2-year spot rate of 6.5%.

1. Using the theories of term structure of interest rates identify several scenarios that would have a tendency of causing the yield curve to become negatively sloped.

2. Explain the Liquidity Premium Theory.