Question 3 (8 marks) The yield to maturity on 1-year zero-coupon bonds is currently 6%; the YTM on 2-year zero-coupon bonds is 7%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 9%. The face value of the bond is $1000. (Note: In this question, the rates are annual rates compounded annually, rather than compounded semi-annually) a. At what price will the bond sell? (2 marks) b. Will the yield to maturity on the bond be larger than 6.5% or smaller than 6.5%? Explain. (Note: you don't have to calculate the exact value of YTM) (2 marks) c. If the expectations theory of the yield curve is correct, what is the market expectation of the price for which the bond will sell next year (a year from now)? (2 marks) d. Recalculate your answer to part (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 1%. (2 marks)