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Q1. Suppose that

the interest rate on one-year bonds is 4 percent today and is expected to be 6

percent one year from now and 7 percent two years from now and 7.5 percent

three years from now.Use the expectations

hypothesis to compute and to graph the yield curve for the next three years.Q2.You have

$1000 to invest over an investment horizon of three years.The bond market offers various options.You can buy (i) a sequence of three one-year

bonds; (ii) a three-year bond; or (iii) a two-year bond followed by a one-year

bond. The current yield curve tells you that the one-year two-year and

three-year yields to maturity are 3.5 percent 4.0 percent and 4.5 percent

respectively.You expect that one-year

interest rates will be 4 percent next year and 5 percent the year after

that.Assuming annual compounding

compute the return on each of the three investments and discuss which one you

would choose.Q3.You and a

friend are reading The Wall Street

Journal and notice that the Treasury yield curve is slightly upward

sloping.Your friend comments that all

looks well for the economy but you are concerned that the economy is heading

for trouble.Assuming you are both

believers in the liquidity premium theory what might account for your

difference of opinion?Q4. What is the

equivalent tax exempt bond yield for a taxable bond with an 8% yield and a

bondholder in a 30% marginal tax rate?