1) Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Input your answers as a percent rounded to 2 decimal places.)

Interest Rate

1-year T-bill at beginning of year 1

4

%

1-year T-bill at beginning of year 2

6

%

1-year T-bill at beginning of year 3

7

%

1-year T-bill at beginning of year 4

9

%

Expecteded Return

2 year security		%
3 year security		%
4 year security		%

2) City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by three days and disbursement time increased by one-half day because of these policies. Excess funds are being invested in short-term instruments yielding 5 percent per annum. a. If City Farm has $4.10 million per day in collections and $3.10 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? (Enter your answer in dollars not in millions (e.g., $1,234,567).)