Several theories have developed over time to explain the shape of yield curves. One of the most fundamental theories is the pure expectations hypothesis.

a)Select the statement below that is a concept upheld by the pure expectations hypothesis:

Forward rates do not necessarily equal future spot rates for the corresponding period. Expectations in the market partly affect the slope of the yield curve. The shape of the yield curve is determined solely by market interest rate expectations. Transaction costs are considered as part of the costs in determining the most attractive yields.

b)The pure expectations hypothesis is appropriate for securities in a liquid marketan illiquid market