Question: Use the table to answer the questions that follow. Current date 08/20/01, Par Value = $1,000 Maturity Coupon Date Rate 02/19/02 2 08/19/02 5.00

Use the table to answer the questions that follow. Current date 08/20/01, Par Value = $1,000 Maturity Coupon Date Rate 02/19/02 2 08/19/02 5.00 3 02/18/03 5.50 4 08/19/03 5.00 1 Price $1,001,22 $990.46 $990.69 (ii) Current YTM 5.75 6.00 6.16 6.10 Spot Rate 5.75 6.00 6.17 6.12 Implied Forward Short Rate 5.75 6.25 6.50 6.00 Questions a. Fill in the missing items (i) (ii) in the table above. b. Suppose that the market's expectations are that (.i.e 6-month) spot interest will remain indefinitely at its current level. Given this, can we say whether or not the liquidity premium theory of the term structure is correct? Justify your answer.

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