The yield to maturity on $1-$year zero$-$coupon bonds is currently $7\mathrm{.}5\%$; the YTM on $2-$year zeros is $8\mathrm{.}5\%.$ The Treasury plans to issue a $2-$

year maturity coupon bond, paying coupons once per year with a coupon rate of $10\%.$ The face value of the bond is $$100.$

Required:

a$.$ At what price will the bond sell?

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places.

b$.$ What will the yield to maturity on the bond be$?$

Note: Do not round intermediate calculations. Round your answer to $3$ decimal places.

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?

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places. Note from Ville: Under the expectations

hypothesis, the expected one$-$year rate one year from now $=$ the current forward rate for year $2.$ Calculate the forward rate and

use it to calculate the expected price of the bond when it has one year until maturity. $($Do not round intermediate calculations.

Round your answer to $2$ decimal places.$)$

d$.$ Recalculate your answer to part $($c$)$ if you believe in the liquidity preference theory and you believe that the liquidity premium is $1\mathrm{.}5\%.$

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places. Under the liquidity preference theory,

the forward rate $=$ market expectation $+$ the liquidity premium. You must deduct the premium in order to find the true market

expectation. $($Do not round intermediate calculations. Round your answer to $2$ decimal places.$)$