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Part $1$

Bond A is a$$ one$-$year instrument and Bond B is a$$ two$-$year instrument. The bonds have very similar default risk and income tax treatment.$$ Currently, the following yields exist on these bonds.

Bond

Yield

A

$4\mathrm{.}004\mathrm{.}00\%$

B

$4\mathrm{.}754\mathrm{.}75\%$

Part $2$

If$($holding all else$$ equal$)$ the interest rate that investors expect on$$ one$-$year instruments next year suddenly

increasesincreases

to

$6\mathrm{.}506\mathrm{.}50\%,$

investors will become

more likely to sellmore$$likely$$to$$sell

more likely to buymore$$likely$$to$$buy

more likely to sellmore$$likely$$to$$sell

neither more likely to buy nor more likely to sellneither$$more$$likely$$to$$buy$$nor$$more$$likely$$to$$sell

$$two$-$year bonds today. This will cause the yield on$$ two$-$year bonds today to

increaseincrease

increaseincrease

remain unchangedremain$$unchanged

decreasedecrease

$.$