3. (20 points) Correlation of Bond Yields Consider the example we discussed in the lecture. Suppose that the Bank of Canada conducted an open market purchase. Specifically, it purchased $100 million 1-year government bonds from the primary dealers (i.e., major financial institutions) in the secondary market. (a) (5 pts) How does this affect the yield to maturity of 1-year government bonds? Please explain with demand and supply framework for bonds. (b) (5 pts) Does this affect the yield to maturity of 10-year government bonds? Why or why not? (c) (5 pts) During the financial crisis in 2008-2009, central banks noticed that a traditional open market purchase of buying short-term government bonds had little effect on the yield to maturity of long-term bonds. Can you think of a reason why this might be the case? (Hint: Our discussion about the YTM of Baa bonds during economic crises has a similar flavour.) (d) (5 pts) If a central bank wants to decrease long-term interest rates, should it conduct an open market purchase or open market sale? Please explain