# Fill in the missing pieces from the following table using the Law of One Price. Assume all

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## Question:

If the expectations theory of the yield curve is correct, what is the market expectation of the price that bond #3 will sell for next year?

If the liquidity preference theory is correct and you believe that the liquidity premium is 2.0 percent, what is the market expectation of the price that bond #4 will sell for next year?

Bond # | 1 | 2 | 3 | 4 |

1 - year strip bond | 2- year strip bond | 2-year 7% coupon bond | 2-year 8% coupon bond | |

Purchase Price for the bond) | 930 | ? | ? | ? |

Year 1 cash flow | 1000 | 0 | 70 | 80 |

Year 2 cash flow | 0 | 1000 | 1070 | 1080 |

Yield to Maturity | ? | ? | 8.50% | ? |

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