Consider the following spot rates: i₀₁ = 6%,i₀₂ = 7%,i₀₃ = 7.5%,i₀₄ = 8%,i₀₅ = 9%.
a. Based on the pure expectations theory, what does the market expect the one-year spot rate to be at the end of year 3?
b. Based on the liquidity premium hypothesis, would you expect the actual one-year spot rate at the end of year 3 to be below the number you computed in part a? Why or why not?
c. Based on the pure expectations hypothesis, what does the market expect the two-year (annualized) spot rate to be at the end of year 3?
d. Can we say whether the yield to maturity on a four-year coupon bond will be above or below 8%? Explain.

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The Answer of Consider the following spot rates: i₀₁ = 6%,i₀₂ = 7%,i₀₃ = 7.5%,i₀₄ = 8%,i₀₅ = 9%. a. Based on the pure expectations theory, what does the market expect the one-year spot rate to be at the end of year 3? b. Based on the liquidity premium hypothesis, would you expect the actual one-year spot rate at the end of year 3 to be below the number you computed in part a? Why or why not? c. Based on the pure expectations hypothesis, what does the market expect the two-year (annualized) spot rate to be at the end of year 3? d. Can we say whether the yield to maturity on a four-year coupon bond will be above or below 8%? Explain.

Consider the Following Spot Rates: I01 = 6%,i02 = 7%,i03

Consider the Following Spot Rates: I₀₁ = 6%,i₀₂ = 7%,i₀₃