solution

You look at data in the U.S. Treasurys
yield curve, (yes, The Wall Street Journal spells as
“Treasurys”) and find the following date embedded in the curve:

1-year
rate = 2.00%

2-year
rate = 2.50%

3-year
rate = 2.75%

4-year
rate = 3.25%

1. (10 points) Using the Pure Expectations Theory (PET), what is
   the expected 1-year rate in one year?

1. (10 points) What would PET expect the 1-year rate to be in
   three years?

1. (20 points) If the Liquidity Premium to invest for two years
   instead of just for one year were 0.40%, and using the Liquidity
   Premium Hypothesis concepts, what would that theory’s expectation
   of the 1-year rate in one year be?