Question: Assume that the one-year interest rate is 1%, the two-year interest rate is 2% and the three-year interest rate is 2%. What is the expected

  1. Assume that the one-year interest rate is 1%, the two-year interest rate is 2% and the three-year interest rate is 2%. What is the expected one-year interest rate a year from now, and two years from, according to the expectations theory?
  2. Assume that the one-year interest rate is 1%, the two-year interest rate is 2%, the three-year interest rate is 2%, the liquidity premium for two-year interest rates is 0.3%. and the liquidity premium for three-year interest rates is 0.4%.What is the expected one-year interest rate a year from now according to the liquidity premium theory?

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