1) explain the basic facts about the "term structure of interest rates" and how these facts may or may not be explained by the three theories discussed in class.

(1.Pure Expectations Theory ("pure"):Only market expectations for future rates will consistently impact the yield curve shape. A positively shaped curve indicates that rates will increase in the future, a flat curve signals that rates are not expected to change, and an inverted yield curve points to interest rates falling in the future.

2.Liquidity Preference Theory ("biased"):Assumes that investors prefer short term bonds to long term bonds because of the increased uncertainty associated with a longer time horizon. Therefore investors demand a liquidity premium for longer dated bonds. This theory has a natural bias toward a positively sloped yield curve.

3.Preferred Habitat Theory ("biased"):Postulates that the shape of the yield curve reflects investor expectations of future interest rates, but rejects the notion of a liquidity preference because some investors prefer longer holding periods. The Preferred Habitat Theory relies heavily on the notion that investors will match assets and liabilities.)

Does these theories can be used in the question 1.

2) discuss about Financial intermediaries, transaction costs and asymmetric information