years. Currently, you can invest either in a security that pays interest of $8\mathrm{.}1\%$ per year for the next $2$ years or in a security that matures in $1$ year but pays only $5\mathrm{.}7\%$ interest. If you make the latter choice, you would then reinvest your savings at the end of the first year for another year.

a$.$ Why might you choose to make the investment in the $1-$year security that pays an interest rate of only $5\mathrm{.}7\%,$ as opposed to investing in the $2-$year security paying $8\mathrm{.}1\%?$ Provide numerical support for your answer. Which theory of term structure have you supported in your answer?

b$.$ Assume your required rate of return on the second$-$year investment is $11\mathrm{.}6\%$; otherwise, you will choose to go with the $2-$year security. What rationale could you offer for your preference?

The required interest rate during the second year is $\%.($Round to one decimal place.$)$

"Thus, you would invest in the $1-$year security paying $5\mathrm{.}7\%$ only if you believed you could earn at least $10\mathrm{.}6\%$ in the second year on a security issued at the beginning of the second year. The foregoing logic is based on the expectations theory of term structure of interest rates."

Is the above statement true or false?

$($Select from the drop$-$down menu.$)$

b$.$ Assume your required rate of return on the second$-$year investment is $11\mathrm{.}6\%$; otherwise, you will choose to go with the $2-$year security. What rationale could you offer for your preference?

$"$If you require an $11\mathrm{.}6\%$ rate on the second one$-$year investment, then the expectations theory is not explaining fully the term structure of interest rates. The expectations theory suggests you should accept $10\mathrm{.}6\%$ in year two. Thus, you are requiring a liquidity$-$risk premium on the second$-$year investment to compensate for the uncertainty of the future interest rates in year two."

Is the above statement true or false?

$($Select from the drop$-$down menu.$)$